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 March 31, 2003.
[ ] 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 Identification Number)
incorporation or organization)
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) had 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) 6,585,902
- ------------------------------------- --------------------------------------
Title of Each Class Number of Shares Outstanding
as of April 28, 2003
Progress Financial Corporation
Table of Contents
PART I -- Interim Financial Information
Page
Item 1. Interim Financial Statements (Unaudited)
Consolidated Interim Balance Sheets as of March 31, 2003 and December 31, 2002.................3
Consolidated Interim Statements of Income for the three months ended
March 31, 2003 and 2002........................................................................4
Consolidated Interim Statements of Changes in Shareholders' Equity and
Comprehensive Income for the three months ended March 31, 2003 and 2002........................5
Consolidated Interim Statements of Cash Flows for the three months ended
March 31, 2003 and 2002........................................................................6
Notes to Consolidated Interim Financial Statements.............................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................16
Item 4. Controls and Procedures.......................................................................16
PART II -- Other Information
Item 1. Legal Proceedings.............................................................................16
Item 2. Changes in Securities.........................................................................16
Item 3. Defaults upon Senior Securities...............................................................17
Item 4. Submission of Matters to a Vote of Security Holders...........................................17
Item 5. Other Information.............................................................................17
Item 6. Exhibits and Reports on Form 8-K..............................................................17
Signatures....................................................................................18
Certifications................................................................................19
PART I -- INTERIM FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited)
Consolidated Interim Balance Sheets
(Dollars in thousands) March 31, December 31,
2003 2002
-------------- ----------------
Assets
Cash and due from other financial institutions:
Non-interest-earning $ 22,166 $ 20,650
Interest-earning 6,650 17,570
Investments and mortgage-backed securities [Note 3]:
Available for sale at fair value (amortized cost: $390,402 and $353,688) 395,603 359,290
Held to maturity at amortized cost (fair value: $145,380 and $121,968) 142,686 120,006
Loans and leases, net [Note 4] (net of reserves [Note 5]: $7,214 and $6,463] 494,914 459,350
Premises and equipment, net 26,352 26,726
Other assets 18,563 14,252
-------------- ----------------
Total assets $1,106,934 $1,017,844
============== ================
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest-bearing $ 106,799 $ 100,075
Interest-bearing 604,751 591,463
Short-term borrowings:
Securities sold under agreements to repurchase 137,265 81,125
Other borrowings 30,418 15,757
Other liabilities 12,674 12,132
Long-term debt:
Federal Home Loan Bank advances 120,500 120,500
Other debt 1,227 1,227
Capital securities 28,844 28,836
-------------- ----------------
Total liabilities 1,042,478 951,115
-------------- ----------------
Commitments and contingencies [Note 9]
Shareholders' Equity:
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: 7,121,000 and
7,058,000 shares issued and outstanding; including treasury shares of
370,000 and 114,000 and unallocated Employee Stock Ownership Plan
shares of 169,000 and 169,000, respectively 7,121 7,058
Other common shareholders' equity, net 53,931 56,006
Net accumulated other comprehensive income 3,404 3,665
-------------- ----------------
Total shareholders' equity 64,456 66,729
-------------- ----------------
Total liabilities and shareholders' equity $1,106,934 $1,017,844
============== ================
See Notes of Consolidated Interim Financial Statements.
Consolidated Interim Statements of Income
(Dollars in thousands, except per share data)
For the Three Months Ended
March 31,
2003 2002
-------------- -------------
Interest income:
Loans and leases, including fees $7,860 $ 8,950
Mortgage-backed securities 5,010 3,370
Investment securities 689 606
Other 21 86
-------------- -------------
Total interest income 13,580 13,012
-------------- -------------
Interest expense:
Deposits 3,564 4,021
Short-term borrowings 671 103
Long-term debt 1,548 1,948
Capital securities 590 572
-------------- -------------
Total interest expense 6,373 6,644
-------------- -------------
Net interest income 7,207 6,368
Provision for loan and lease losses 700 1,439
-------------- -------------
Net interest income after provision for loan and lease losses 6,507 4,929
-------------- -------------
Non-interest income:
Service charges on deposits 806 854
Lease financing fees 37 63
Mutual fund, annuity and insurance commissions 610 940
Loan brokerage and advisory fees 311 273
Private equity fund management fees 65 52
Gain on sale of securities 323 --
Gain on sale of loan and lease receivables 164 132
Client warrant income 197 1,426
Fees and other 323 804
-------------- -------------
Total non-interest income 2,836 4,544
-------------- -------------
Non-interest expense:
Salaries and employee benefits 3,892 4,401
Occupancy 716 586
Data processing 227 257
Furniture, fixtures and equipment 491 546
Professional services 647 578
Other 1,348 1,988
-------------- -------------
Total non-interest expense 7,321 8,356
-------------- -------------
Income before income taxes 2,022 1,117
Income tax expense 575 367
-------------- -------------
Net income $1,447 $ 750
============== =============
Basic earnings per common share $ .22 $ .12
Diluted earnings per common share $ .21 $ .12
Dividends per common share $ .06 $ --
Basic average common shares outstanding 6,710,508 6,206,177
Diluted average common shares outstanding 6,932,383 6,342,450
See Notes to Consolidated Interim Financial Statements.
Consolidated Interim Statements of Changes in Shareholders' Equity and
Comprehensive Income
(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 three months ended March 31, 2003:
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $7,058 $(1,050) $(1,341) $(75) $51,536 $6,936 $3,665 $66,729
Issuance of stock under
employee benefits plans
(63,580 common shares) 63 -- -- 24 184 -- -- 271
Net income -- -- -- -- -- 1,447 -- $1,447 1,447
Other comprehensive loss, net
of tax(A) -- -- -- -- -- -- (261) (261) (261)
-----------
Net comprehensive income $1,186
===========
Cash dividends declared -- -- -- -- -- (410) -- (410)
Purchase of treasury stock -- (3,320) -- -- -- -- -- (3,320)
- ------------------------------------------------------------------------------------------------------- ------------
Balance at March 31, 2003 $7,121 $(4,370) $(1,341) $(51) $51,720 $7,973 $3,404 $64,456
======================================================================================================= ============
For the three months ended March 31, 2002:
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $5,818 $(628) $(1,448) $(107) $44,029 $3,620 $ (685) $50,599
Issuance of stock under
employee benefits plans
(64,375 common shares) 64 -- -- 30 237 -- -- 331
Retirement of restricted stock
awards (782 common shares) (1) -- -- 9 (8) -- -- --
Net income -- -- -- -- -- 750 -- $750 750
Other comprehensive loss,
net of tax(A) -- -- -- -- -- -- (584) (584) (584)
------------
Net comprehensive income $166
============
Issuance of stock under
private placement
(1,153,330 common shares) 1,153 -- -- -- 7,071 -- -- 8,224
- ------------------------------------------------------------------------------------------------------ ------------
Balance at March 31, 2002 $7,034 $(628) $(1,448) $ (68) $51,329 $4,370 $(1,269) $59,320
====================================================================================================== ============
(A) For the three months ended March 31, 2003 2002
- ----------------------------------------------------------------------------------------------
Calculation of other comprehensive loss, net of tax:
Unrealized holding losses arising during the period, net of tax $(48) $(584)
Less: Reclassification for gains included in net income, net of tax 213 --
-------- ----------
Other comprehensive loss, net of tax $(261) $(584)
======== ==========
See Notes to Consolidated Interim Financial Statements.
Consolidated Interim Statements of Cash Flows
(Dollars in thousands)
For the three months ended March 31, 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $1,447 $ 750
Add (deduct) items not affecting cash flows from operating activities:
Depreciation and amortization 675 753
Provision for loan and lease losses 700 1,439
Client warrant income (197) (1,426)
Gain on sale of securities available for sale (323) --
Gain on sale of loan and lease receivables (164) (132)
Accretion of deferred loan and lease fees and expenses (292) (368)
Amortization of premiums/accretion of discounts on securities 1,074 451
Other, net 69 (67)
(Increase) decrease in other assets (4,381) 3,634
Increase in other liabilities 696 3,362
------------ -------------
Net cash flows provided by (used in) operating activities (696) 8,396
------------ -------------
Cash flows from investing activities:
Capital expenditures (232) (289)
Purchases of investments and mortgage-backed securities available for sale (136,805) (81,899)
Purchases of investments and mortgage-backed securities held to maturity (28,763) (27,361)
Repayments on mortgage-backed securities available for sale 37,721 19,769
Repayments on mortgage-backed securities held to maturity 5,920 16
Proceeds from sales, maturities and calls of investment and mortgage-backed
securities available for sale 61,985 4,193
Proceeds from redemptions and calls of investment securities held to maturity -- 650
Proceeds from the sale of loans and leases 2,597 7,197
Net cash paid in sale of TechBanc -- (21,399)
Net (increase) decrease in loans and lease receivables (38,445) 15,712
Other, net -- 30
------------ -------------
Net cash flows used in investing activities (96,022) (83,381)
------------ -------------
Cash flows from financing activities:
Net increase in demand, NOW and savings deposits 12,254 28,898
Net increase in time deposits 7,745 6,569
Net increase in short-term borrowings 70,801 22,519
Dividends paid (410) --
Purchases of treasury shares (3,320) --
Net proceeds from issuance of stock under employee benefit plans 244 285
Net proceeds from issuance of stock in private placement -- 8,224
------------ -------------
Net cash flows provided by financing activities 87,314 66,495
------------ -------------
Net decrease in cash and cash equivalents (9,404) (8,490)
Cash and cash equivalents:
Beginning of year 38,220 32,526
------------ -------------
End of period $28,816 $24,036
============ =============
Supplemental disclosures:
Net conversion of loans to real estate owned $ -- $ 2,705
============ =============
See Notes to Consolidated Interim Financial Statements.
Notes to Consolidated Interim Financial Statements
(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 March 31, 2003 and December 31, 2002 and for the three months ended
March 31, 2003 and 2002 in conformity with accounting principles generally
accepted in the United States of America. The 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, 2002.
Operating results for the three months ended March 31, 2003 are not
necessarily indicative of the results that may be expected for any other
interim period or the entire year ending December 31, 2003. The Company's
subsidiaries are Progress Bank (the "Bank"), Progress Capital, Inc.,
Progress Financial Resources, Inc., KMR Management, Inc., and Progress
Capital Management, Inc. All significant intercompany transactions have
been eliminated.
(2) Shareholders' Equity
Common Stock Offering and Repurchase Program
--------------------------------------------
On February 11, 2002, the Company issued 1,153,330 shares of common stock
at $7.50 a share in a private placement offering to accredited investors,
resulting in net proceeds of approximately $8.2 million.
Under the Company's 2002 stock repurchase program to repurchase up to
200,000 shares, or five percent, of its outstanding common stock, 50,000
shares were repurchased during 2002 and 150,000 shares were repurchased
during 2003. On February 26, 2003, the Company announced a new stock
repurchase program to repurchase up to 335,000 shares, or five percent, of
it outstanding common stock; 106,178 shares were repurchased as of March
31, 2003.
Earnings per Share
------------------
The following table presents a summary of per share data and amounts for
the included periods.
For the three months ended March 31, 2003 2002
--------------------------------------- -------------------------------- -----------------------------------
(Dollars in thousands, except per Income Shares Per Income Shares Per
share data) Share Share
Amount Amount
-------- -------- --------- ------- -------- ---------
Basic earnings per share:
Income available to common
shareholders $1,447 6,710,508 $.22 $750 6,206,177 $.12
===== ======
Effect of dilutive securities:
Options -- 221,875 -- -- 136,273 --
-------- ---------- ------- -----------
Diluted earnings per share:
Income available to common
shareholders and assumed
conversions $1,447 6,932,383 $.21 $750 6,342,450 $.12
======== ========== ===== ======= =========== ======
Pro Forma Stock Based Compensation
----------------------------------
The Company accounts for its stock options under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. No stock-based compensation
cost is reflected in net income, as all options granted had an exercise
price equal to the market value of the underlying common stock on the date
of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provision of FASB Statement No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.
For the three months ended March 31, 2003 2002
------------------------------------------------------------------- ----------------- --------------------
(Dollars in thousands, except per share data)
Net income, as reported $1,447 $750
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
grants, net of related tax effects 78 29
----------------- --------------------
Pro forma net income $1,369 $721
================= ====================
Earnings per share:
Basic--as reported $.22 $.12
Basic--pro forma $.20 $.12
Diluted--as reported $.21 $.12
Diluted--pro forma $.20 $.11
Capital Resources
-----------------
At March 31, 2003, the Bank's tangible equity ratio was 7.29%, Tier 1
leverage ratio was 7.31%, Tier 1 risk-based capital ratio was 13.24%, and
total risk-based capital ratio was 14.39%. At March 31, 2003, the Bank was
considered "well capitalized" under the Federal Deposit Insurance
Corporation Improvement Act of 1991.
(3) 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
Amortized Unrealized Unrealized Estimated Carrying
At March 31, 2003 Cost Gains Losses Fair Value Value
------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Available for Sale:
Equity investments $ 1,601 $ 32 $ 14 $ 1,619 $ 1,619
U.S. Government agencies 2,002 20 -- 2,022 2,022
Bank deposits 166 -- -- 166 166
Corporate bonds 5,954 181 557 5,578 5,578
Mortgage-backed securities 380,679 5,657 118 386,218 386,218
-------------------------------------------------------------------------------------------------------------------
Total available for sale $390,402 $5,890 $689 $395,603 $395,603
====================================================================================================================
Held to Maturity:
Federal Home Loan Bank Stock $ 9,719 $ -- $ -- $ 9,719 $ 9,719
U.S. Government agencies 3,390 14 -- 3,404 3,390
Municipal bonds 47,148 1,278 77 48,349 47,148
Mortgage-backed securities 82,429 1,488 9 83,908 82,429
----------------------------------------- -------------- ------------ --------------- -------------- --------------
Total held to maturity $142,686 $2,780 $ 86 $145,380 $142,686
========================================= ============== ============ =============== ============== ==============
Gross Gross
Amortized Unrealized Unrealized Estimated Carrying
At December 31, 2002 Cost Gains Losses Fair Value Value
-----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Available for Sale:
Equity investments $ 1,696 $ -- $ 11 $ 1,685 $ 1,685
U.S. Government agencies 10,653 13 -- 10,666 10,666
Bank deposits 166 -- -- 166 166
Corporate bonds 8,034 198 556 7,676 7,676
Mortgage-backed securities 333,139 6,014 56 339,097 339,097
-----------------------------------------------------------------------------------------------------------------
Total available for sale $353,688 $6,225 $623 $359,290 $359,290
=================================================================================================================
Held to Maturity:
Federal Home Loan Bank Stock $ 8,401 $ -- $ -- $ 8,401 $ 8,401
U.S. Government agencies 3,330 52 -- 3,382 3,330
Municipal bonds 34,805 736 190 35,351 34,805
Mortgage-backed securities 73,470 1,377 13 74,834 73,470
-----------------------------------------------------------------------------------------------------------------
Total held to maturity $120,006 $2,165 $203 $121,968 $120,006
=================================================================================================================
At March 31, 2003, certain equity investments are accounted for under the
"equity method." Losses of $194,000 were recognized on these equity
investments during the first quarter.
(4) Loans and Lease Receivables, Net
The following table depicts the composition of the Company's loan and lease
portfolio at the dates indicated:
At March 31, 2003 At December 31, 2002
------------------------------ -------------------------------
(Dollars in thousands) Amount Percent Amount Percent
-------------- ------------- ------------- ----------
Commercial business $ 84,818 16.89% $83,994 18.03%
Commercial real estate 222,719 44.36 199,672 42.87
Construction, net of loans in process 96,377 19.19 87,728 18.83
Single family residential real estate 29,364 5.85 26,870 5.77
Consumer loans 54,599 10.87 50,105 10.76
Lease financing 15,965 3.18 19,673 4.22
Unearned income ( 1,714) (.34) (2,229) (.48)
-------------- ------------- ------------- ------------
Total loans and leases 502,128 100.00% 465,813 100.00%
============= ============
Allowance for loan and lease losses ( 7,214) (6,463)
-------------- -------------
Net loans and leases $494,914 $459,350
============== =============
(5) 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:
For the Three Months Ended
March 31,
-------------------------------
(Dollars in thousands) 2003 2002
------------- -------------
Balance at beginning of period $6,463 $9,917
Charge-offs:
Commercial business:
TechBanc 90 1,248
All other commercial business -- 53
------------- -------------
Total commercial business 90 1,301
Commercial real estate -- 696
Lease financing 60 724
------------- -------------
Total charge-offs 150 2,721
------------- -------------
Recoveries:
Commercial business:
TechBanc 110 65
All other commercial business -- --
------------- -------------
Total commercial business 110 65
Consumer loans 1 1
Lease financing 90 74
------------- -------------
Total recoveries 201 140
------------- -------------
Net charge-offs (recoveries) (51) 2,581
Additions charged to operations 700 1,439
------------- -------------
Balance at end of period $7,214 $8,775
============= =============
Specific Valuation Allowance on Impaired Loans $ 300 $ 47
============= =============
(6) TechBanc Sale
In January 2002, the Company completed the sale of TechBanc, a division of
the Bank, 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.
(7) Goodwill, Servicing Assets and Other Intangible Assets
Changes in the carrying amounts of goodwill related to each business
segment for the three months ended March 31, 2003 are presented below:
(Dollars in thousands) Banking Equipment Other Total
Leasing Segments Goodwill
---------------------------------------------------------
Balance at December 31, 2002 $468 $112 $277 $857
Impairment losses recognized -- -- -- --
--------------------------------------------------------
Balance at March 31, 2003 $468 $112 $277 $857
=========================================================
The gross carrying amount, accumulated amortization and net carrying amount
for each of the Company's identified intangible assets and servicing rights
subject to amortization is presented below:
At March 31, 2003 At December 31, 2002
-------------------------------------- -------------------------------------
(Dollars in thousands) Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
-------------------------------------- -------------------------------------
Customer-related intangible $ 655 $(391) $264 $ 655 $(347) $308
Servicing rights 467 (165) 302 427 (147) 280
------------ ------------ ------------ ------------ ------------ -----------
Total $1,122 $(556) $566 $1,082 $(494) $588
============ ============ ============ ============ ============ ===========
(8) Capital Securities
In December 2002, the Company issued $5.0 million of variable rate capital
securities due January 7, 2033 (the "Capital Securities IV") in a private
offering managed by Credit Suisse First Boston. At March 31, 2003 the
interest rate was 4.76% (three month LIBOR plus 3.35%, capped at 12.5%
until January 7, 2008, the date on which the Company can call the capital
securities). The Capital Securities IV were issued by the Company's
subsidiary, Progress Capital Trust IV (the "Trust IV"), a statutory
business trust created under the laws of Delaware. The Company is the owner
of all of the common securities of the Trust IV. The Trust IV issued $5.0
million of Capital Securities IV (and together with the preferred and
common securities of the Trust, the "Trust Securities IV"), the proceeds
from which were used by the Trust IV, along with the Company's $155,000
capital contribution for the common securities, to acquire $5.2 million
aggregate principal amount of the Company's Junior Subordinated Debentures
due January 7, 2033, which constitute the sole assets of the Trust IV. The
Company has fully, irrevocably and unconditionally guaranteed all of the
Trust's obligations under the Capital Securities IV.
In November 2002, the Company issued $10.0 million of variable rate capital
securities due November 8, 2032 (the "Capital Securities III") in a private
offering managed by Trapeza CDO I, LLC. At March 31, 2003 the interest rate
was 4.69% (three month LIBOR plus 3.35%, capped at 12% until November 15,
2007, the date on which the Company can call the capital securities). The
Capital Securities III 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 Trust III issued $10.0 million of variable
rate Capital Securities III (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 Notes due November 8, 2032,
which constitute the sole assets of the Trust III. The Company has fully,
irrevocably and unconditionally guaranteed all of the Trust III's
obligations under the Capital Securities III.
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 "Capital Securities II"), in a private offering managed
by First Union Securities, Inc. The Capital Securities II 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 Capital
Securities II. The Company is the owner of all of the common securities of
the Trust II. The Trust II issued $6.0 million of 11.445% Capital
Securities II (and together with the common securities, the "Trust II
Securities"), the proceeds from which were used by the Trust II along with
the Company's $186,000 capital contribution for the common securities, to
acquire $6.2 million aggregate principal amount of the Company's 11.445%
Junior Subordinated Notes due July 19, 2030, which constitute the sole
assets of the Trust II. The Company has fully, irrevocably and
unconditionally guaranteed all of the Trust II's obligations under the
Capital Securities II.
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 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 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 the
Bank, to increase its regulatory capital ratios and support the growth of
the expanded lending operations. During 2002, the Company retired $6.3
million of the Capital Securities and recorded a loss on the extinguishment
of debt of $25,000.
(9) Commitments and Contingencies
At March 31, 2003, the Company had $193.0 million in loan commitments to
extend credit, including unused lines of credit, and $8.7 million in
letters of credit outstanding.
(10) Segments
The following table sets forth selected financial information by business
segment for the periods indicated:
(Dollars in thousands) Private Insurance/
Equipment Equity Fund Wealth Other
Banking Leasing Management Management Segments Corporate Total
------------------------------------------------------------------------------------------
Total Assets at:
March 31, 2003 $1,087,881 $14,925 $42 $451 $448 $3,187 $1,106,934
December 31, 2002 986,455 18,262 44 521 595 11,967 1,017,844
Revenues for the three months ended:
March 31, 2003 9,812 306 65 606 37 (783) 10,043
March 31, 2002 9,684 583 52 934 200 (541) 10,912
Net income (loss) for the three months ended:
March 31, 2003 2,154 (87) 20 66 (65) (641) 1,447
March 31, 2002 1,452 (172) (25) 33 (76) (462) 750
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, 2002. Certain reclassifications
have been made to prior period data throughout the following discussion and
analysis for comparability with 2003 data.
This report on Form 10-Q contains forward-looking statements that involve
risks and uncertainties that could cause actual results to differ materially
from estimates. 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 Available for Sale. There have not been any material changes in the
Company's critical accounting policies since December 31, 2002. Further
descriptions of the Company's critical accounting policies can be found in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
Pro-forma data associated with Stock-Based Compensation for the current quarter
can be found in Footnote 2 of the Notes to Consolidated Interim Financial
Statements included as Item 1 of this Form 10-Q.
RESULTS OF OPERATIONS
The Company recognized net income of $1.4 million, or diluted earnings per share
of $.21, for the three months ended March 31, 2003 compared to $750,000, or $.12
per diluted share, for the first quarter of 2002. Return on average
shareholders'equity was 8.87% and return on average assets was .56% for the
three months ended March 31, 2003 compared to 5.33% and .35%, respectively, for
the three months ended March 31, 2002.
Net Interest Income
Tax-equivalent net interest income for the quarter ended March 31, 2003
increased $973,000, or 15%, compared to the first quarter of 2002 and increased
$444,000, or 6%, compared to the fourth quarter of 2002. The net interest margin
for the first quarter of 2003 was 3.02% (FTE) compared to 3.25% (FTE) for the
first quarter of 2002 and 3.09% (FTE) for the fourth quarter of 2002.
Average earning assets for the first quarter of 2003 were $999.8 million
compared to $809.6 million for the first quarter of 2002. The increase in
earning assets for the three months ended March 31, 2003 from the comparable
period in 2002 was primarily due to higher levels of investments in
mortgage-backed securities. Tax-equivalent interest income for the first quarter
of 2003 increased $702,000, or 5%, over the same period in 2002 while interest
expense decreased $271,000, or 4%, for the same period.
Provision for Loan and Lease Losses
The provision for loan and lease losses was $700,000 for the quarter ended March
31, 2003, compared to $1.4 million for the same period in 2002. The higher
provision during 2002 was primarily due to charge-offs in the TechBanc portfolio
(which was subsequently sold) and the reserve additions to address credit and
economic concerns which have now been reduced as a result of the reduction in
the Company's classified assets.
At March 31, 2003, the allowance for loan and leases losses amounted to $7.2
million or 1.44% of total loans and leases and 132.49% of total non-performing
loans and leases. At December 31, 2002, the allowance for loan and leases losses
amounted to $6.5 million or 1.39% of total loans and leases and 118.65% of total
non-performing loans and leases.
Non-interest Income
Non-interest income for the quarter ended March 31, 2003 was $2.8 million
compared to $4.5 million for the same period in 2002. This decrease was the
result of a variety of factors. The quarter ended March 31, 2003 included client
warrant income of $197,000 compared to $1.4 million during the first quarter of
2002. Fee income for the quarter decreased $605,000 primarily due to a decrease
in mutual fund, annuity and insurance commissions from the Company's subsidiary,
Progress Financial Resources, Inc., and a reduction in consulting fees from the
Company's subsidiary, KMR Management, Inc. Gain on sale of securities was
$323,000 for the first quarter of 2003 compared to no gain or loss on sale of
securities during the same quarter in 2002.
Non-interest Expense
Total non-interest expense was $7.3 million for the quarter ended March 31,
2003, a decrease of $1.1 million compared to $8.4 million for the first quarter
of 2002. Salaries and employee benefits decreased by $509,000 for the three
months ended March 31, 2003 from the comparable period in 2002, mainly due to
decreased commission volume for Progress Financial Resources, Inc. and lower
staffing levels at KMR Management, Inc. Other expenses decreased $575,000 in the
first quarter of 2003 compared to the first quarter of 2002 primarily due to
recoveries of real estate owned expenses during 2003, loan workout expenses
during 2002 and an uncollectible receivable from a client of KMR during 2002.
FINANCIAL CONDITION
Total assets increased to $1.1 billion at March 31, 2003 from $1.0 billion at
December 31, 2002. Loans and leases outstanding totaled $502.1 million at March
31, 2003 compared to $465.8 million at December 31, 2002. This increase was
primarily due to net growth in the commercial real estate loan portfolio of
$23.0 million and in the construction loan portfolio of $8.6 million.
Investments and mortgage-backed securities increased $59.0 million primarily due
to net increases in mortgage-backed securities of $56.1 million and in municipal
bonds of $12.3 million, partially offset by net decreases in U.S. Government
agency securities of $8.6 million. Total deposits increased to $711.6 million at
March 31, 2003 from $691.5 million at December 31, 2002 primarily due to net
increases in non-interest-bearing demand deposits and time deposits.
Liquidity and Funding
The Company must maintain sufficient liquidity to meet its funding requirements
for loan 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 deposits 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 agreements 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 three months ended March 31, 2003, the
Company reinvested its working capital primarily by purchasing mortgage-backed
securities to maintain its liquidity. For the three months ended March 31, 2003,
cash was used in investing activities primarily due to purchases of
mortgage-backed securities; cash was provided by financing activities primarily
due to increases in short-term borrowings.
Non-performing and Underperforming Assets
The following tables details the Company's non-performing and underperforming
assets at the dates indicated:
(Dollars in Thousands) December 31,
March 31, 2003 2002 March 31, 2002
----------------- ----------------- -----------------
Loans and leases accounted for on a non-accrual basis $5,445 $5,447 $ 9,342
Other real estate owned, net of related reserves -- -- 4,243
----------------- ----------------- -----------------
Total non-performing assets 5,445 5,447 13,585
Accruing loans 90 or more days past due 2,213 918 3,244
----------------- ----------------- -----------------
Total underperforming assets $7,658 $6,365 $16,829
================= ================= =================
Non-performing assets as a percentage of net loans and
leases and real estate owned 1.10% 1.19% 2.87%
================= ================= =================
Non-performing assets as a percentage of total assets .49% .54% 1.55%
================= ================= =================
Underperforming assets as a percentage of net loans and
leases and real estate owned 1.55% 1.39% 3.55%
================= ================= =================
Underperforming assets as a percentage of total assets .69% .63% 1.92%
================= ================= =================
Allowance for loan and lease losses $7,214 $6,463 $8,775
Ratio of allowance for loan and lease losses to
non-performing loans and leases at end of period 132.49% 118.65% 93.93%
================= ================= =================
Ratio of allowance for loan and lease losses to
underperforming loans and leases at end of period 94.20% 101.54% 69.72%
================= ================= =================
Non-performing assets of $5.4 million at March 31, 2003 remained level compared
to December 31, 2002 as additions of loans and leases to non-accrual status were
primarily offset by payments on non-accrual loans and leases. Non-performing
assets decreased from $13.6 million at March 31, 2002 primarily due to principal
payments, charge-offs and a net decrease in real estate owned of $4.2 million.
As of December 31, 2002, the Company had no real estate owned. The $5.4 million
in non-performing loans at March 31, 2003 primarily consisted of: $4.3 million
in commercial business loans (of which $433,000 were TechBanc loans); $521,000
of lease financings; $158,000 of commercial real estate loans; $246,000 of
consumer loans; and $211,000 of single family residential mortgages.
Accruing loans 90 or more days past due increased to $2.2 million at March 31,
2003 from $918,000 at December 31, 2002 primarily due to a commercial real
estate loan. The $2.2 million of accruing loans 90 or more days past due at
March 31, 2003 consisted primarily of: $1.1 million of commercial business loans
(of which $1.0 million are TechBanc loans) and $1.1 million of commercial real
estate loans.
Delinquencies
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:
(Dollars in thousands) March 31, 2003 December 31, 2002 March 31, 2002
--------------------------- ------------------------------ ---------------------------
Amount Percent Amount Percent Amount Percent
------------ ----------- ------------- ------------- ------------ -----------
Delinquencies:
30 to 59 days $1,563 .31% $3,205 .69% $4,999 1.04%
60 to 89 days 1,076 .22 1,511 .32 701 .15
90 or more days 2,213 .44 918 .20 3,244 .68
------------ ----------- ------------- ------------- ------------ -----------
Total $4,852 .97% $5,634 1.21% $8,944 1.87%
============ =========== ============= ============= ============ ===========
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, 2002, Item 7A, filed with the Securities
and Exchange Commission on March 21, 2003. The market risk of the Company has
not experienced any significant changes as of March 31, 2003 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 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 shareholders' 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
believed that this action was 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. On March 28, 2003,
the Court granted the motion, dismissing the complaint in the action. The appeal
period of 30 days has expired.
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
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K
1. On January 22, 2003, the Company filed a Current Report
under Item 5 announcing the Fourth Quarter 2002 earnings,
declaration of the quarterly cash dividend and the
distribution of the analyst package.
2. On February 28, 2003, the Company filed a Current Report
under Item 5 announcing that Frank A. Farnesi has joined
the Board of Directors for Progress Financial Corporation.
3. On February 28, 2003, the Company filed a Current Report
under Item 5 announcing the completion of its repurchase
of 200,000 shares of common stock and the authorization
of additional repurchase up to 335,000 shares.
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
May 9, 2003 /s/ W. Kirk Wycoff
- --------------------------- -----------------------------------------
Date W. Kirk Wycoff, Chairman, President and
Chief Executive Officer
May 9, 2003 /s/ Michael B. High
- --------------------------- ------------------------------------------
Date Michael B. High, Chief Operating Officer
and Chief Financial 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 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 functions):
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 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: May 9, 2003
/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 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 functions):
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 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: May 9, 2003
/s/ Michael B. High
-----------------------------------
Name: Michael B. High
Title: Chief Operating Officer and
Chief Financial Officer
Exhibit 99.1
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 March 31, 2003 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: May 9, 2003
A signed original of this written statement required by Section 906 has
been provided to the Registrant and will be retained by the Registrant and
furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 99.2
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 March 31, 2003 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: May 9, 2003
A signed original of this written statement required by Section 906 has been
provided to the Registrant and will be retained by the Registrant and furnished
to the Securities and Exchange Commission or its staff upon request.