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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, 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 (Zip Code)
offices)
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) 7,156,734
- -------------------------------------------- -------------------------------
Title of Each Class Number of Shares Outstanding as
of October 31, 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 September 30, 2003 and December 31, 2002.............3
Consolidated Interim Statements of Income for the three and nine months ended
September 30, 2003 and 2002....................................................................4
Consolidated Interim Statements of Changes in Shareholders' Equity and
Comprehensive Income for the nine months ended September 30, 2003 and 2002.....................5
Consolidated Interim Statements of Cash Flows for the nine months ended
September 30, 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.....................................................................15
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................20
Item 4. Controls and Procedures.......................................................................20
PART II -- Other Information
Item 1. Legal Proceedings.............................................................................20
Item 2. Changes in Securities.........................................................................20
Item 3. Defaults upon Senior Securities...............................................................20
Item 4. Submission of Matters to a Vote of Security Holders...........................................20
Item 5. Other Information.............................................................................20
Item 6. Exhibits and Reports on Form 8-K..............................................................21
Signatures....................................................................................22
PART I -- INTERIM FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited)
Consolidated Interim Balance Sheets
(Dollars in thousands) September 30, December 31,
2003 2002
-------------- ----------------
Assets
Cash and due from other financial institutions:
Non-interest-earning $ 22,856 $ 20,650
Interest-earning 17,506 17,570
Investments and mortgage-backed securities [Note 5]:
Available for sale at fair value (amortized cost: $328,661 and $353,688) 328,388 359,290
Held to maturity at amortized cost (fair value: $218,316 and $121,968) 216,989 120,006
Loans and leases, net [Note 6] (net of reserves [Note 7]: $7,283 and $6,463) 554,924 459,350
Premises and equipment, net [Note 10] 22,093 26,726
Other assets [Note 11] 15,794 14,252
-------------- ----------------
Total assets $1,178,550 $1,017,844
============== ================
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest-bearing $ 110,137 $ 100,075
Interest-bearing 636,421 591,463
Short-term borrowings:
Securities sold under agreements to repurchase 116,796 81,125
Federal Home Loan Bank advances 50,000 15,000
Other borrowings 318 757
Other liabilities 10,014 12,132
Long-term debt:
Federal Home Loan Bank advances 160,500 120,500
Other debt 1,165 1,227
Capital securities [Note 12] 28,861 28,836
-------------- ----------------
Total liabilities 1,114,212 951,115
-------------- ----------------
Commitments and contingencies [Note 13]
Shareholders' Equity [Note 4]:
Serial preferred stock--$.01 par value; 1,000,000 shares authorized but unissued -- --
Common stock -- $1 par value; 12,000,000 shares authorized: 7,229,000 and
7,058,000 shares issued and outstanding; including treasury shares of
138,000 and 114,000 and unallocated Employee Stock Ownership Plan
shares of 170,000 and 169,000, respectively 7,229 7,058
Other common shareholders' equity, net 57,310 56,006
Net accumulated other comprehensive income (loss) (201) 3,665
-------------- ----------------
Total shareholders' equity 64,338 66,729
-------------- ----------------
Total liabilities and shareholders' equity $1,178,550 $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 For the Nine Months
September 30, Ended September 30,
---------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ----------- -----------
Interest income:
Loans and leases, including fees $8,802 $8,250 $25,311 $25,725
Mortgage-backed securities 4,210 4,490 13,864 12,145
Investment securities 979 674 2,453 1,908
Other 17 59 60 181
------------ ------------ ----------- -----------
Total interest income 14,008 13,473 41,688 39,959
------------ ------------ ----------- -----------
Interest expense:
Deposits 3,137 4,011 10,222 11,872
Short-term borrowings 494 322 1,727 733
Long-term and subordinate debt 1,658 1,772 4,809 5,580
Capital securities 584 548 1,760 1,693
------------ ------------ ----------- -----------
Total interest expense 5,873 6,653 18,518 19,878
------------ ------------ ----------- -----------
Net interest income 8,135 6,820 23,170 20,081
Provision for loan and lease losses 560 500 1,760 2,939
------------ ------------ ----------- -----------
Net interest income after provision for loan and lease losses 7,575 6,320 21,410 17,142
------------ ------------ ----------- -----------
Non-interest income:
Service charges on deposits 950 916 2,623 2,748
Lease financing fees 23 50 89 176
Mutual fund, annuity and insurance commissions 502 478 1,757 2,096
Loan brokerage and advisory fees 565 78 1,517 653
Private equity fund management fees 66 65 196 182
Gain on sale of securities 55 84 1,101 436
Gain on sale of loan and lease receivables 207 148 544 495
Gain on sale of real estate 1,201 1,570 1,201 1,570
Gain (loss) on extinguishment of debt (559) 25 (559) 25
Client warrant income -- 466 197 1,927
Fees and other 321 471 1,104 1,803
------------ ------------ ----------- -----------
Total non-interest income 3,331 4,351 9,770 12,111
------------ ------------ ----------- -----------
Non-interest expense:
Salaries and employee benefits 3,847 3,906 11,774 12,211
Occupancy 691 720 1,972 1,967
Data processing 225 215 695 702
Furniture, fixtures and equipment 459 511 1,427 1,566
Professional services 513 597 1,838 1,816
Goodwill and other intangible assets impairment losses
and amortization 315 602 443 819
Other 1,301 1,739 4,303 5,332
------------ ------------ ----------- -----------
Total non-interest expense 7,351 8,290 22,452 24,413
------------ ------------ ----------- -----------
Income before income taxes 3,555 2,381 8,728 4,840
Income tax expense 1,153 1,066 2,502 1,868
------------ ------------ ----------- -----------
Net income $ 2,402 $ 1,315 $ 6,226 $ 2,972
============ ============ =========== ===========
Basic earnings per common share $ .35 $ .19 $ .90 $ .43
Diluted earnings per common share $ .33 $ .18 $ .86 $ .42
Dividends per common share $ .08 $ .05 $ .20 $ .05
Basic average common shares outstanding 6,877,012 7,156,448 6,939,955 6,938,077
Diluted average common shares outstanding 7,260,264 7,315,752 7,253,205 7,099,438
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 nine months ended September 30, 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
(171,039 common shares;
7,375 ESOP shares) 171 -- 57 23 1,240 -- -- 1,491
Retirement of restricted
stock awards (46 common
shares) 1 (1) --
Net income -- -- -- -- -- 6,226 -- $6,226 6,226
Other comprehensive loss, net
of tax(A) -- -- -- -- -- -- (3,866) (3,866) (3,866)
------------
Net comprehensive income $2,360
============
Cash dividends declared -- -- -- -- -- (1,360) -- (1,360)
Stock dividend declared
(337,236 treasury shares;
8,427 ESOP shares) -- 3,942 -- -- 782 (4,724) -- --
Purchase of treasury stock
(361,178 shares) -- (4,882) -- -- -- -- -- (4,882)
- ----------------------------------------------------------------------------------------------------- -----------
Balance at September 30, 2003 $7,229 $(1,990) $(1,284) $ (51) $53,557 $ 7,078 $ (201) $64,338
===================================================================================================== ===========
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 benefits plans
(86,829 common shares;
6,681 ESOP shares) 87 -- 53 30 385 -- -- 555
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 shares) -- 144 -- -- 39 -- -- 183
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
===================================================================================================== ===========
(A) For the nine months ended September 30, 2003 2002
- ---------------------------------------------------------------------------------------------------
Calculation of other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising during the period,net of tax $(3,140) $4,607
Less: Reclassification for gains included in net income, net of tax 726 288
-------- -------
Other comprehensive income (loss), net of tax $(3,866) $4,319
======== =======
See Notes to Consolidated Interim Financial Statements.
Consolidated Interim Statements of Cash Flows
(Dollars in thousands)
For the nine months ended September 30, 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 6,226 $ 2,972
Add (deduct) items not affecting cash flows from operating activities:
Depreciation and amortization losses 1,837 2,760
Provision for loan and lease losses 1,760 2,939
Client warrant income (197) (1,927)
Gain on sale of securities available for sale (1,101) (436)
Gain on sale of loan and lease receivables (544) (495)
Gain on sale of real estate (1,201) (1,570)
(Gain) loss on extinguishment of debt 559 (25)
Accretion of deferred loan and lease fees and expenses (1,320) (948)
Amortization of premiums/accretion of discounts on securities 3,259 1,268
Other, net 413 68
Increase in other assets (3,045) (12,888)
Increase (decrease) in other liabilities (2,458) 5,133
------------ --------------
Net cash flows provided by (used in) operating activities 4,188 (3,149)
------------ --------------
Cash flows from investing activities:
Capital expenditures (2,885) (4,117)
Purchases of investments and mortgage-backed securities available for sale (269,892) (197,168)
Purchases of investments and mortgage-backed securities held to maturity (129,597) (68,605)
Repayments on mortgage-backed securities available for sale 134,527 58,699
Repayments on mortgage-backed securities held to maturity 28,562 2,035
Proceeds from sales, maturities and calls of investment and mortgage-backed
securities available for sale 160,163 53,654
Proceeds from redemptions and calls of investment securities held to maturity 3,411 15,499
Proceeds from the sale of loans and leases 8,027 14,650
Net proceeds from sale of Progress Holdings, Inc. 1,906 --
Net cash paid in sale of TechBanc -- (21,399)
Net proceeds from the sale of real estate 9,942 8,259
Net distributions from unconsolidated entities -- 831
Net (increase) decrease in loans and lease receivables (105,517) 25,017
Other, net -- (555)
------------ --------------
Net cash flows used in investing activities (161,353) (113,200)
------------ --------------
Cash flows from financing activities:
Net increase in demand, NOW and savings deposits 67,591 33,367
Net increase (decrease) in time deposits (12,685) 46,355
Net increase in short-term borrowings 70,170 17,494
Proceeds from issuance of long-term debt 50,000 3,500
Early extinguishment of long-term debt (10,559) --
Extinguishment of capital securities -- (1,454)
Dividends paid (1,360) (340)
Purchases of treasury shares (4,882) --
Proceeds from sale of treasury shares -- 183
Net proceeds from issuance of stock under employee benefit plans 1,032 441
Net proceeds from issuance of stock in private placement -- 8,224
Other, net -- (7)
------------ --------------
Net cash flows provided by financing activities 159,307 107,763
------------ --------------
Net increase (decrease) in cash and cash equivalents 2,142 (8,586)
Cash and cash equivalents:
Beginning of year 38,220 32,526
------------ --------------
End of period $40,362 $23,940
============ ==============
Consolidated Interim Statements of Cash Flows (Continued)
(Dollars in thousands)
For the nine months ended September 30, 2003 2002
- -----------------------------------------------------------------------------------------------------------------
Supplemental disclosures:
Net conversion of loans to real estate owned $ -- $ 3,326
====== ========
Cash payments for:
Income taxes $ 4,738 $ 83
======= =======
Interest $19,458 $20,089
======= =======
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 normal
and recurring adjustments necessary for a fair presentation of the
financial information as of September 30, 2003 and December 31, 2002 and
for the three and nine months ended September 30, 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 and nine months ended September 30, 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. Earnings per share have been
adjusted to reflect all stock dividends and prior period amounts have been
reclassified when necessary to conform with current period classification.
The Company's subsidiaries are Progress Bank (the "Bank"), Progress
Capital, Inc. ("PCI"), Progress Financial Resources, Inc. ("PFR"), KMR
Management, Inc. ("KMR") and Progress Capital Management, Inc. ("PCM"). All
significant intercompany transactions have been eliminated.
(2) Pending Acquisition
The Company and FleetBoston Financial Corporation ("FleetBoston") entered
into an Agreement and Plan of Merger, dated as of August 27, 2003 (the
"Merger Agreement"), which sets forth the terms and conditions pursuant to
which the Company will be merged with and into FleetBoston (the "Merger").
The Merger Agreement provides, among other things, that as a result of the
Merger each outstanding share of the Company's common stock (subject to
certain exceptions) will be converted into the right to receive 0.9333 (the
"Exchange Ratio") of a share of FleetBoston common stock, plus cash in lieu
of any fractional share interest. The Exchange Ratio is fixed at 0.9333
provided the average closing price of FleetBoston common stock is not more
than 10% above or below the starting price of $30.00. The average closing
price means the average of the daily last sales prices for FleetBoston
common stock as reported on the New York Stock Exchange for the 10
consecutive full trading days ending at the close of trading on the
determination date, which is the date on which the last required regulatory
approval is received. If the average closing price is more than 10% above
or more than 10% below the $30.00 starting price, then the Exchange Ratio
will be adjusted to provide the Company's stockholders with a maximum per
share value of $30.80 and a minimum per share value of $25.20,
respectively.
Consummation of the Merger is subject to a number of customary conditions,
including, but not limited to, (i) the approval of the Merger Agreement by
the shareholders of the Company and (ii) the receipt of requisite
regulatory approvals of the Merger and the proposed merger of the Company's
banking subsidiary, Progress Bank, with and into FleetBoston's banking
subsidiary, Fleet National Bank. The Merger is expected to close during the
first quarter of 2004.
(3) Recent Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46").
FIN 46 provides a new framework for identifying variable interest entities
("VIEs") and determining when a company should include the assets,
liabilities, noncontrolling interests and results of activities of a VIE in
its consolidated financial statements. FIN 46 is effective immediately for
VIEs created after January 31, 2003. In October 2003, FIN 46-6 was issued
deferring the effective date for variable interest entities that existed
prior to February 1, 2003 to the first interim or annual period ending
after December 15, 2003. The adoption of the provisions of FIN 46 is not
expected to have a material impact on the Company's financial condition or
results of operations, earnings per share or cash flows.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities". FAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under FAS 133. The amendments in FAS
149 improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. The Statement clarifies under
what circumstances a contract with an initial net investment meets the
characteristic of a derivative in FAS 133. In addition, FAS 149 clarifies
when a derivative contains a financing component that warrants special
reporting in the statement of cash flows. FAS 149 amends certain other
existing pronouncements. FAS 149 is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after
June, 30, 2003. The provisions of FAS 149 that relate to FAS 133
Implementation issues that have been effective for fiscal quarters that
began prior to June 15, 2003, are to be applied in accordance with their
respective effective dates. The Company does not anticipate any material
changes to its financial representation as a result of adopting FAS 149.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". FAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
The Statement requires that an issuer classify a financial instrument that
is within its scope as a liability (or an asset in some circumstances).
Many of these instruments were previously classified as equity. FAS 150
requires an issuer to classify the following instruments as liabilities (or
assets in some circumstances): 1) mandatorily redeemable shares, which the
issuing company is obligated to buy back in exchange for cash or other
assets 2) put options and forward purchase contracts that require or may
require the issuer to buy back some of its shares in exchange for cash or
other assets 3) obligations that can be settled with shares, the monetary
value of which is fixed, tied solely or predominantly to a variable such as
a market index, or varies inversely with the value of the issuers' shares.
Disclosures are required about the terms of the instruments and settlement
alternatives. FAS 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety. The Statement is
effective for all financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. During the fourth quarter of 2002,
the Company reclassified its capital securities to debt and the related
expense from non-interest expense to interest on borrowings.
(4) 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; 211,178 shares were repurchased as of August
27, 2003. Under the Merger Agreement, the Company may not repurchase
additional common shares.
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, 2003 2002
------------------------------------------- --------------------------------- ------------------------------------
(Dollars in thousands, except per share Per Per
data) Share Share
Income Shares Amount Income Shares Amount
-------- -------- --------- -------- -------- --------
Basic earnings per share:
Income available to common shareholders $2,402 6,877,012 $.35 $1,315 7,156,448 $.19
==== ====
Effect of dilutive securities:
Options -- 383,252 -- 159,304
------ --------- ------ ---------
Diluted earnings per share:
Income available to common
shareholders and assumed conversions $2,402 7,260,264 $.33 $1,315 7,315,752 $.18
====== ========= ==== ====== ========= ====
------------------------------------------- ---------------------------------- -----------------------------------
For the nine months ended September 30, 2003 2002
------------------------------------------- ---------------------------------- -----------------------------------
(Dollars in thousands, except per share Per Per
data) Share Share
Income Shares Amount Income Shares Amount
-------- -------- --------- -------- -------- --------
Basic earnings per share:
Income available to common shareholders $6,226 6,939,955 $.90 $2,972 6,938,077 $.43
==== ====
Effect of dilutive securities:
Options -- 313,250 -- 161,361
------ --------- ------ ---------
Diluted earnings per share:
Income available to common
shareholders and assumed conversions $6,226 7,253,205 $.86 $2,972 7,099,438 $.42
====== ========= ==== ====== ========= ====
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 September 30, 2003 2002
------------------------------------------------------------------- ----------------- --------------------
(Dollars in thousands, except per share data)
Net income, as reported $2,402 $1,315
Deduct: Total stock-based employee compensation expense
(income) determined under fair value based method for
all grants, net of related tax effects (26) 57
----------------- --------------------
Pro forma net income $2,428 $1,258
================= ====================
Earnings per share:
Basic--as reported $ .35 $ .19
Basic--pro forma .35 .18
Diluted--as reported .33 .18
Diluted--pro forma .33 .18
For the nine months ended September 30, 2003 2002
------------------------------------------------------------------- ----------------- --------------------
(Dollars in thousands, except per share data)
Net income, as reported $6,226 $2,972
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
grants, net of related tax effects 105 154
----------------- --------------------
Pro forma net income $6,121 $2,818
================= ====================
Earnings per share:
Basic--as reported $ .90 $ .43
Basic--pro forma .88 .41
Diluted--as reported .86 .42
Diluted--pro forma .84 .40
Incentive Stock Options ("ISO's") ordinarily do not result in a tax
deduction; therefore the FAS 123 compensation expense is treated as an
unfavorable permanent difference (no tax benefit is recorded on the income
statement). However, if an event subsequently occurs that would give rise
to a tax deduction, such as a disqualified disposition, the tax benefit is
recorded on the income statement in the year it occurs (giving rise to a
favorable permanent difference), as long as the recognizable taxable
compensation is not greater than the FAS 123 cumulative compensation
expense recognized for ISO's. Any tax benefit recognizable on the excess
taxable compensation would be recorded against Surplus. During the third
quarter of 2003, taxable compensation resulting from disqualified
dispositions did not exceed the cumulative compensation expense on ISO's
resulting in tax benefits recognized of $92,000, which more than offset the
accrued compensation expense for the quarter.
Capital Resources
-----------------
At September 30, 2003, the Bank's tangible equity ratio was 7.31%, Tier 1
leverage ratio was 7.33%, Tier 1 risk-based capital ratio was 12.95%, and
total risk-based capital ratio was 13.99%. At September 30, 2003, the Bank
was considered "well capitalized" under the prompt and corrective action
regulations of the Office of Thrift Supervision adopted pursuant to the
Federal Deposit Insurance Corporation Improvement Act of 1991.
(5) 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 September 30, 2003 Cost Gains Losses Fair Value Value
--------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Available for Sale:
Equity investments $ 6,068 $ 83 $ 502 $ 5,649 $ 5,649
U.S. Government agencies 2,001 7 -- 2,008 2,008
Corporate bonds and other 11,248 218 351 11,115 11,115
Mortgage-backed securities 309,344 2,547 2,275 309,616 309,616
----------------------------------------- -------------- ------------ --------------- -------------- --------------
Total available for sale $328,661 $2,855 $3,128 $328,388 $328,388
========================================= ============== ============ =============== ============== ==============
Held to Maturity:
Federal Home Loan Bank Stock $ 12,485 $ -- $ -- $ 12,485 $ 12,485
Municipal bonds 73,164 1,441 1,007 73,598 73,164
Mortgage-backed securities 131,340 1,631 738 132,233 131,340
----------------------------------------- -------------- ------------ --------------- -------------- --------------
Total held to maturity $216,989 $3,072 $1,745 $218,316 $216,989
========================================= ============== ============ =============== ============== ==============
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
Corporate bonds and other 8,200 198 556 7,842 7,842
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 September 30, 2003, certain equity investments are accounted for under
the "equity method." Losses of $194,000 were recognized on these equity
investments during the nine months ended September 30, 2003. There were no
gains or losses recognized on these equity investments during the nine
months ended September 30, 2002. Other equity investments were written down
for impairments of $150,000 and $244,000 during the nine months ended
September 30, 2003 and 2002, respectively.
(6) Loans and Lease Receivables, Net
The following table depicts the composition of the Company's loan and lease
portfolio at the dates indicated:
At September 30, 2003 At December 31, 2002
-------------------------------- -------------------------------
(Dollars in thousands) Amount Percent Amount Percent
-------- --------- --------- ---------
Commercial business $ 83,028 14.77% $ 83,994 18.03%
Commercial real estate 233,193 41.48 199,672 42.87
Construction, net of loans in process 115,117 20.48 87,728 18.83
Single family residential real estate 30,629 5.45 26,870 5.77
Consumer loans 93,011 16.54 50,105 10.76
Lease financing 7,887 1.40 19,673 4.22
Unearned income (658) (.12) (2,229) (.48)
-------- ----- -------- ------
Total loans and leases 562,207 100.00% 465,813 100.00%
====== ======
Allowance for loan and lease losses (7,283) (6,463)
-------- --------
Net loans and leases $554,924 $459,350
======== ========
(7) 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 For the Nine Months Ended
Ended September 30, September 30,
------------------------ -------------------------
(Dollars in thousands) 2003 2002 2003 2002
------ ------ ------ ------
Balance at beginning of period $7,245 $8,024 $6,463 $9,917
Charge-offs:
Commercial business:
TechBanc -- 1,122 373 3,815
All other commercial business 397 61 456 234
------ ------ ------ ------
Total commercial business 397 1,183 829 4,049
Commercial real estate -- 61 -- 757
Consumer loans 34 12 58 12
Lease financing 169 571 453 1,547
------ ------ ------ ------
Total charge-offs 600 1,827 1,340 6,365
------ ------ ------ ------
Recoveries:
Commercial business:
TechBanc 8 272 141 360
All other commercial business 11 10 18 10
------ ------ ------ ------
Total commercial business 19 282 159 370
Consumer loans 1 1 2 3
Lease financing 58 120 239 236
------ ------ ------ ------
Total recoveries 78 403 400 609
------ ------ ------ ------
Net charge-offs 522 1,424 940 5,756
Additions charged to operations 560 500 1,760 2,939
------ ------ ------ ------
Balance at end of period $7,283 $7,100 $7,283 $7,100
====== ====== ====== ======
Specific Valuation Allowance on Impaired Loans $ 359 $ 314 $ 359 $ 314
====== ====== ====== ======
(8) Sale of Progress Holdings, Inc.
On July 1, 2003, the Company completed the sale of the Bank's subsidiary
Progress Holdings, Inc. ("PHI") to an independent third party leasing
company. The stock of PHI was sold for $25,000. PHI owns 100% of Progress
Leasing Company ("PLC") which was included in the sale. At the sale date,
PLC had total assets of $1.9 million, which consisted solely of lease
financing receivables held for sale, and total borrowings of $1.9 million.
The Bank entered into a servicing agreement with this same independent
third party leasing company to service the remaining lease finance
receivables held by the Company's Equipment Leasing segment.
(9) 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.
(10) Premises and Equipment
In September 2003, the Company completed the sale of its corporate
headquarters building in Blue Bell, Pennsylvania. The Company will continue
to occupy the second floor under a long-term lease. The transaction was
accounted for as a sale-leaseback transaction. The sale price was $10.2
million which resulted in a pre-tax gain of approximately $1.2 million
recognized in the third quarter of 2003 and a deferred gain of
approximately $2.7 million which will offset future rental expense over the
next seven years.
(11) Goodwill, Servicing Assets and Other Intangible Assets
During the third quarter of 2003, the Company decided to exit the
consulting business operated by KMR and wrote off the remaining goodwill
associated with KMR. This resulted in a non-tax-deductible write-off of
$277,000 in the Other business segments. Changes in the carrying amounts of
goodwill related to each business segment for the nine months ended
September 30, 2003 are presented below:
(Dollars in thousands) Equipment Other Total
Banking Leasing Segments Goodwill
------------- --------------- -------------- --------------
Balance at December 31, 2002 $468 $112 $277 $857
Write-off of goodwill associated
with exit from business -- -- (277) (277)
------------- --------------- -------------- --------------
Balance at September 30, 2003 $468 $112 $ -- $580
============= =============== ============== ==============
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 September 30, 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 $(513) $142 $ 655 $(347) $308
Servicing rights 530 (207) 323 427 (147) 280
------------ ------------ ------------ ------------ ------------ -----------
Total $1,185 $(720) $465 $1,082 $(494) $588
============ ============ ============ ============ ============ ===========
(12) 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 September 30, 2003 the
interest rate was 4.46% (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 September 30, 2003 the interest
rate was 4.48% (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.
(13) Commitments and Contingencies
At September 30, 2003, the Company had $213.4 million in loan commitments
to extend credit, including unused lines of credit, and $8.5 million in
letters of credit outstanding.
(14) 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:
September 30, 2003 $1,167,319 $ 7,033 $48 $395 $109 $ 3,646 $1,178,550
December 31, 2002 986,455 18,262 44 521 595 11,967 1,017,844
Revenues for the three months ended:
September 30, 2003 11,065 202 66 502 58 (427) 11,466
September 30, 2002 10,626 445 65 472 266 (703) 11,171
Net income (loss) for the three months ended:
September 30, 2003 2,974 103 24 (32) (297) (370) 2,402
September 30, 2002 2,579 (156) 31 (22) (535) (582) 1,315
(Dollars in thousands) Private Insurance/
Equipment Equity Fund Wealth Other
Banking Leasing Management Management Segments Corporate Total
----------- ----------- -------------- -------------- ------------ ----------- ------------
Revenues for the nine months ended:
September 30, 2003 $31,733 $ 722 $196 $1,748 $225 $(1,684) $32,940
September 30, 2002 29,587 1,611 182 2,078 724 (1,990) 32,192
Net income (loss) for the nine months ended:
September 30, 2003 8,150 (235) 67 68 (385) (1,439) 6,226
September 30, 2002 5,550 (319) 33 (40) (612) (1,640) 2,972
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. Earnings per share have been
adjusted to reflect all stock dividends and 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 4 of the Notes to Consolidated Interim Financial
Statements included as Item 1 of this Form 10-Q.
RESULTS OF OPERATIONS--THREE MONTHS ENDED SEPTEMBER 30, 2003 VERSUS 2002
The Company recognized net income of $2.4 million, or diluted earnings per share
of $.33, for the three months ended September 30, 2003 compared to $1.3 million,
or $.18 per diluted share, for the third quarter of 2002. Return on average
shareholders' equity was 15.70% and return on average assets was .83% for the
three months ended September 30, 2003 compared to 8.05% and .57%, respectively,
for the three months ended September 30, 2002.
Net Interest Income
Tax-equivalent net interest income for the three months ended September 30, 2003
increased $1.6 million, or 23%, compared to the third quarter of 2002. The
tax-equivalent net interest margin for the third quarter of 2003 was 3.09%
compared to 3.24% for the third quarter of 2002.
Average earning assets for the third quarter of 2003 were $1.10 billion, an
increase of $243.1 million or 29%, compared to $852.3 million for the third
quarter of 2002. The increase in earning assets for the third quarter of 2003
from the comparable period in 2002 was primarily due to higher levels of
investments in mortgage-backed securities. The Company also experienced
significant increases in tax-exempt municipal securities and consumer,
commercial real estate and construction loans. Tax-equivalent interest income
for the third quarter of 2003 increased $792,000, or 6%, over the same period in
2002 primarily due to tax-exempt municipal securities and consumer and
commercial real estate loans. Interest expense for the third quarter of 2003
decreased $780,000, or 12%, over the same period in 2002 primarily due to lower
interest rates on time deposits.
Provision for Loan and Lease Losses
The provision for loan and lease losses was $560,000 for the third quarter of
2003, compared to $500,000 for the same period in 2002.
Non-interest Income
Non-interest income for the third quarter of 2003 was $3.3 million, a decrease
of 23% compared to $4.4 million for the same period in 2002. This decrease was
the result of a variety of factors. During the third quarter of 2003, a loss on
extinguishment of debt of $559,000 was recognized compared to a gain of $25,000
for the comparable period in 2002. Gain on sale of real estate was $1.2 million
for the third quarter of 2003 compared to $1.6 million during the same quarter
in 2002. During the third quarter of 2002, client warrant income of $466,000 was
recognized while none was reported in the third quarter of 2003. Fee income for
the three months ended September 30, 2003 increased $271,000 from the comparable
quarter in 2002 primarily due to an increase in loan brokerage and advisory fees
partially offset by a decrease in consulting fees from the Company's subsidiary
KMR Management, Inc. ("KMR").
Non-interest Expense
Total non-interest expense was $7.4 million for the quarter ended September 30,
2003, a decrease of 11% compared to $8.3 million for the same period in 2002.
During the current quarter, the Company recognized non-recurring expenses
amounting to $277,000 associated with the impairment of goodwill for KMR
compared to $547,000 for the same period in 2002. During the quarter, the
Company decided to exit the consulting business operated by KMR and wrote off
all the goodwill associated with KMR. Other expenses decreased $438,000
primarily due to expenses related to real estate owned and write-downs of used
asset inventory for Progress Leasing during the third quarter of 2002.
RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 2003 VERSUS 2002
The Company recognized net income of $6.2 million, or diluted earnings per share
of $.86, for the nine months ended September 30, 2003 compared to $3.0 million,
or $.42 per diluted share, for the same period in 2002. Return on average
shareholders' equity was 13.02% and return on average assets was .76% for the
nine months ended September 30, 2003 compared to 6.49% and .45%, respectively,
for the nine months ended September 30, 2002.
Net Interest Income
Tax-equivalent net interest income for the nine months ended September 30, 2003
increased $3.7 million, or 18%, compared to the same period in 2002. The
tax-equivalent net interest margin for the nine months ended September 30, 2003
was 3.07% compared to 3.28% for the same period in 2002.
Average earning assets for the nine months ended September 30, 2003 were $1.05
billion, an increase of $215.0 million or 26%, compared to $834.8 million for
the same period in 2002. The increase in earning assets for the nine months
ended September 30, 2003 from the comparable period in 2002 was primarily due to
higher levels of investments in mortgage-backed securities. The Company also
experienced significant increases in tax-exempt municipal securities and
consumer, commercial real estate and construction loans. Tax-equivalent interest
income for the nine months ended September 30, 2003 increased $2.3 million, or
6%, over the same period in 2002 primarily due to mortgage-backed and tax-exempt
municipal securities and commercial real estate loans. Interest expense for the
nine months ended September 30, 2003 decreased $1.4 million, or 7%, over the
same period in 2002 primarily due to lower interest rates on time deposits.
Provision for Loan and Lease Losses
The provision for loan and lease losses was $1.8 million for the nine months
ended September 30, 2003, compared to $2.9 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 September 30, 2003, the allowance for loan and leases losses amounted to $7.3
million or 1.30% of total loans and leases and 141.06% 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 nine months ended September 30, 2003 was $9.8
million, a decrease of 19% compared to $12.1 million for the same period in
2002. This decrease was the result of a variety of factors, including, among
others, a decline in client warrant income. The nine months ended September 30,
2003 included client warrant income of $197,000 compared to $1.9 million during
the same period in 2002. Fee income for the nine months ended September 30, 2003
decreased $323,000 primarily due to a decrease in mutual fund, annuity and
insurance commissions from the Company's subsidiary Progress Financial
Resources, Inc. ("PFR") and a reduction in consulting fees from the Company's
subsidiary KMR, partially offset by an increase in loan brokerage and advisory
fees. A loss on extinguishment of debt of $559,000 was recognized compared to a
gain of $25,000 for the comparable period in 2002. Gain on sale of securities
was $1.1 million for the nine months ended September 30, 2003, an increase of
$665,000 compared to $436,000 for the same period in 2002.
Non-interest Expense
Total non-interest expense was $22.5 million for the nine months ended September
30, 2003, a decrease of 8% compared to $24.4 million for the same period in
2002. Salaries and employee benefits decreased by $437,000 for the nine months
ended September 30, 2003 from the comparable period in 2002, mainly due to
decreased commission volume for PFR. Other expenses decreased $1.0 million for
the nine months ended September 30, 2003 primarily due to recoveries of real
estate owned expenses during 2003 and expenses during 2002 related to real
estate owned, loan workouts, an uncollectible receivable from a client of KMR
and write-downs of used asset inventory for Progress Leasing.
FINANCIAL CONDITION
Total assets increased 16% to $1.18 billion at September 30, 2003 from $1.02
billion at December 31, 2002. Loans and leases outstanding increased $96.4
million, or 21% at September 30, 2003 compared to $465.8 million at December 31,
2002. This increase was primarily due to net growth in the consumer loans of
$42.9 million, commercial real estate loan portfolio of $33.5 million and in the
construction loan portfolio of $27.4 million. Investments and mortgage-backed
securities increased $66.1 million primarily due to net increases in municipal
bonds of $38.4 million and mortgage-backed securities of $28.4 million. Total
deposits increased $55.0 million or 8%, to $746.6 million at September 30, 2003
from $691.5 million at December 31, 2002 primarily due to net increases in money
market accounts of $57.0 million.
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 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 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 nine months ended September 30, 2003, the
Company reinvested its working capital primarily by funding loan growth and
purchasing municipal securities; working capital provided by sales and
repayments of mortgage-backed securities was reinvested by purchasing additional
mortgage-backed securities to maintain its liquidity. For the nine months ended
September 30, 2003, cash was used in investing activities primarily due to
funding loan growth; cash was provided by financing activities primarily due to
increases in money market 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:
(Dollars in Thousands) September 30, December 31, September 30,
2003 2002 2002
---------------- ---------------- ---------------
Loans and leases accounted for on a non-accrual basis $5,163 $5,447 $ 7,542
Other real estate owned, net of related reserves -- -- 872
------ ------ -------
Total non-performing assets 5,163 5,447 8,414
Accruing loans 90 or more days past due 2,682 918 2,735
------ ------ -------
Total underperforming assets $7,845 $6,365 $11,149
====== ====== =======
Non-performing assets as a percentage of net loans and
leases and real estate owned .93% 1.19% 1.86%
====== ====== =======
Non-performing assets as a percentage of total assets .44% .54% .91%
====== ====== =======
Underperforming assets as a percentage of net loans and
leases and real estate owned 1.41% 1.39% 2.47%
====== ====== =======
Underperforming assets as a percentage of total assets .67% .63% 1.20%
====== ====== =======
Allowance for loan and lease losses $7,283 $6,463 $7,100
====== ====== =======
Ratio of allowance for loan and lease losses to
non-performing loans and leases at end of period 141.06% 118.65% 94.14%
====== ====== =======
Ratio of allowance for loan and lease losses to 92.84% 101.54% 69.09%
underperforming loans and leases at end of period ====== ====== =======
Non-performing assets decreased to $5.2 million at September 30, 2003 from $5.4
million at December 31, 2002 as additions of loans and leases to non-accrual
status were more than offset by payments and charge-offs on non-accrual loans
and leases. Non-performing assets decreased from $8.4 million at September 30,
2002 primarily due to principal payments, charge-offs and a net decrease in real
estate owned of $872,000. As of September 30, 2003 and December 31, 2002, the
Company had no real estate owned. The $5.2 million in non-performing loans and
leases at September 30, 2003 primarily consisted of: $4.2 million in commercial
business loans (of which $2.3 million were asset-based loans and $185,000 were
TechBanc loans); $398,000 of lease financings; $158,000 of commercial real
estate loans; $372,000 of consumer loans; and $84,000 of single family
residential mortgages.
Accruing loans 90 or more days past due increased to $2.7 million at September
30, 2003 from $918,000 at December 31, 2002 primarily due to increases in
past-due commercial real estate loans. The $2.7 million of accruing loans 90 or
more days past due at September 30, 2003 consisted primarily of: $192,000 of
commercial business loans and $2.5 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)
September 30, 2003 December 31, 2002 September 30, 2002
------------ -- ----------- ------------- -- ------------- ------------ -- -----------
Amount Percent Amount Percent Amount Percent
------------ ----------- ------------- ------------- ------------ -----------
Delinquencies:
30 to 59 days $4,125 .73% $3,205 .69% $1,879 .41%
60 to 89 days 583 .10 1,511 .32 2,328 .51
90 or more days 2,682 .48 918 .20 2,735 .59
------ ---- ------ ---- ------ ----
Total $7,390 1.31% $5,634 1.21% $6,942 1.51%
====== ==== ====== ==== ====== ====
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 September 30, 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 (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of the end of the period covered by 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 over financial reporting, or in other
factors, that could significantly affect these controls during the most recent
fiscal quarter.
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.
In June 2003, a civil suit was filed by the U.S. Small Business Administration
("SBA") as receiver for Acorn Technology Fund, L.P. ("Acorn"), a Small Business
Investment Company, against the Bank. In October 2001, the Bank acquired two
branches, including deposits and loans, from Main Street Bancorp, Inc. One of
the loans purchased was a $2.0 million term loan to Princeton Technology
Management LLC ("PTM"), due May 31, 2002 and collateralized by a $2.0 million
certificate of deposit in the name of Acorn. During the second quarter of 2002,
the loan to PTM matured and the Bank used the proceeds from the certificate of
deposit held as collateral to satisfy the loan. The SBA alleges that the general
partner of Acorn lacked the authority to pledge Acorn's assets as collateral for
PTM and that the Bank wrongfully deprived Acorn of its property by applying the
funds from the certificate of deposit as payment on the loan. The SBA seeks the
recovery of $2.0 million that it deems was wrongfully transferred to the Bank.
The Bank denies any liability and has filed its response to this civil suit,
which is currently in the discovery phase.
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
2.1* Agreement and Plan of Merger by and among FleetBoston
Financial Corporation and Progress Financial Corporation,
dated August 27, 2003 (Exhibit 2.1 to the Company's Current
Report on Form 8-K filed with the Securities and Exchange
Commission (the "SEC") on September 3, 2003.)
2.2* Form of Agreement and Plan of Merger by and between Fleet
National Bank and Progress Bank (included as Exhibit A to
the Agreement filed as Exhibit 2.1) (Exhibit 2.2 to the
Company's Current Report on Form 8-K filed with the SEC on
September 3, 2003.)
10.1 Employment Termination and Release Agreement between
FleetBoston Financial Corporation and W. Kirk Wycoff dated
August 26, 2003.
31.1 Certification of Chief Executive Officer filed pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer filed pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer filed pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer filed pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
*Incorporated by reference.
(b) Reports on Form 8-K
1. On July 23, 2003, the Company filed a Current Report under
Items 7 and 9 announcing the Second Quarter 2003 earnings
and the distribution of the analyst package.
2. On July 25, 2003, the Company filed a Current Report under
Items 7 and 9 announcing the declaration of the quarterly
cash dividend.
3. On September 3, 2003, the Company filed a Current Report
under Items 5 and 7 announcing the plan of merger with
FleetBoston Financial Corporation.
4. On September 16, 2003, the Company filed a Current Report
under Item 5 announcing the sale of the Company's corporate
headquarters building in Blue Bell, Pennsylvania.
5. On October 21, 2003, the Company filed a Current Report
under Items 5, 7 and 12 announcing the Third Quarter 2003
earnings, the distribution of the analyst package and the
declaration of the 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 12, 2003 /s/ W. Kirk Wycoff
- --------------------------- --------------------------------------------
Date W. Kirk Wycoff, Chairman, President and
Chief Executive Officer
November 12, 2003 /s/ Michael B. High
- --------------------------- --------------------------------------------
Date Michael B. High, Chief Operating Officer and
Chief Financial Officer