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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2001
Commission File Number: 0-14815
PROGRESS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-2413363
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4 Sentry Parkway - Suite 200
P. O. Box 3036
Blue Bell, Pennsylvania 19422-0764
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 825-8800
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Securities registered pursuant to Section 12(b) of the Act: Non applicable
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, $ 1.00 par value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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The aggregate market value of the voting stock, held by non-affiliates of the
Registrant as a group, was $52,487,799 as of March 8, 2002, based upon the
closing price of $8.51 per share of the Registrant's common stock on March 8,
2002 as reported by The Nasdaq Stock Market(SM).
As of March 8, 2002, there were 6,758,044 issued and outstanding shares of the
Registrant's Common Stock.
Documents Incorporated By Reference:
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(1) Portions of the definitive proxy statement for the 2002 Annual Meeting of
Shareholders are incorporated into Part III, Items 10 through 13 of this
Form 10-K.
PROGRESS FINANCIAL CORPORATION
Table of Contents
PART I Page
Item 1. Business ............................................................................. 3
Item 2. Properties ........................................................................... 10
Item 3. Legal Proceedings .................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders .................................. 10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ............ 10
Item 6. Selected Consolidated Financial Data ................................................. 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................................. 12
Item 7A. Quantitative and Qualitative Disclosure about Market Risk ........................... 26
Item 8. Financial Statements and Supplementary Data .......................................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ............................................................... 58
PART III
Item 10. Directors and Executive Officers of the Registrant .................................. 58
Item 11. Executive Compensation .............................................................. 58
Item 12. Security Ownership of Certain Beneficial Owners and Management ...................... 58
Item 13. Certain Relationships and Related Transactions ...................................... 59
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ..................... 59
Signatures .......................................................................... 61
2
PART I
Item 1. Business
General
Progress Financial Corporation (the "Company"), headquartered in Blue
Bell, Pennsylvania, is a financial services company incorporated under the laws
of the State of Delaware. The Company owns all of the outstanding stock of
Progress Bank (the "Bank"), a federally chartered savings bank. The Company is a
registered unitary thrift holding company and is authorized as a Delaware
corporation to engage in any activity permitted by the Delaware General
Corporation Law and federal law and regulation. The holding company structure
permits the Company to expand the size and scope of the financial services
offered beyond those that the Bank is permitted to offer.
The Company's current business strategy is to focus on community
banking and wealth management, providing a full range of traditional banking
services including commercial business loans, commercial real estate loans,
residential construction and consumer lending, funded primarily by customer
deposits and providing financial planning services, life insurance and
investments. The Company's business activities also include commercial mortgage
banking and brokerage services and financial and operational management
consulting services for commercial clients, which provide an additional source
of fee income. The Company began 2001 focused on its corporate simplification
program, which commenced in early 2000. As part of this new strategy, the
Company reduced the number of its businesses at the end of 2001, including
venture fund management and real estate development. The Bank also sold the
technology lending group to Comerica Bank--California ("Comerica") which closed
in January 2002.
Banking. The Bank increased its retail network with the addition of four banking
offices during 2001 expanding further into Bucks County, Pennsylvania and into
the state of New Jersey. The Bank has a total of twenty banking offices in the
Delaware Valley area with ten full-service banking offices located in Montgomery
County, four full-service banking offices in Bucks County, one full-service
banking office in Delaware County, two full-service banking offices in Chester
County, two full-service banking offices in Philadelphia County, in southeastern
Pennsylvania and one full-service banking office in Lambertville, Hunterdon
County, New Jersey. In 2001, banking hours were expanded at all banking offices
to give clients increased convenience of banking. Also, during 2001, item
processing was brought in-house, providing more management oversight, greater
operational efficiency and improved quality.
Historically, the principal business of the Company consisted of
attracting deposits from the general public through the Bank's banking office
network and using such deposits to originate loans secured by first mortgage
liens on existing single-family residential, multi-family residential and
commercial real estate as well as to originate construction loans. Beginning in
1995, the Company's emphasis shifted to commercial business, commercial real
estate, construction lending and equipment leasing, with a focus on providing
such banking services to small- and medium-sized businesses, including companies
in the technology sector. During 2001, the Company decided to reduce its
exposure in the technology sector and dedicate its resources to more traditional
lines of business which have a more predictable earnings level including
expanding the retail franchise and focusing on core banking. Therefore, the
Company exited the business of lending to pre-profit companies and in November
2001 entered into an agreement to sell a significant portion of loans in the
technology sector, which was closed in January 2002. The Company also
de-emphasized the equipment leasing operation and is exiting asset-based
lending.
The Company also invests in mortgage-backed securities, including
securities which are insured or guaranteed by the U.S. Government and agencies
thereof, and other similar investments permitted by applicable laws and
regulations. In addition, the Bank is periodically involved in real estate
development and related activities, through its subsidiaries, primarily to
facilitate the completion and sale of certain property held as real estate
owned.
Commercial Business Lending. The Bank's commercial business lending
area, which excludes loans that had been originated through TechBanc (discussed
on page 4), provides customized loan, deposit and investment products, as well
as cash management services to small- and lower middle-market businesses.
Through the Bank, the Company originates secured or unsecured loans for
commercial, corporate, business and agricultural purposes, which include the
issuance of letters of credit.
As a result of acquisitions of small- and medium-sized financial
institutions by large bank holding companies in southeastern Pennsylvania in
recent years, a growing number of small- and middle-market commercial customers
have sought the full range of commercial banking services that the Bank offers
due to the personalized service the Bank provides. The Company believes it has
an opportunity to expand further its commercial lending relationships and
increase its commercial deposits due to the willingness to tailor its products
to the small- and middle-market businesses. The Bank has made a
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concentrated effort to offer high net worth individuals enhanced private banking
products and services working closely with Progress Financial Resources, Inc. to
identify and meet the specialized investment and wealth planning needs of this
affluent market.
The Bank's commercial business lending portfolio was $99.3 million at
December 31, 2001. Most commercial business loan customers are small- to
middle-market businesses located in the Bank's primary market area. Generally,
commercial business loans are between $100,000 and $2.5 million; however, the
largest commercial business loan at December 31, 2001 was $3.5 million. The Bank
provides eBusiness Banking, a device that makes commercial cash management
products available on-line. Several eBusiness Banking access packages are
available to coordinate with the different types of business checking accounts.
Government Guaranteed Lending started in January 2000 providing loans
through a variety of federally guaranteed programs, primarily those administered
by the Small Business Administration ("SBA"). The Bank has been awarded
Preferred Lending Program status, reserved for the most active and knowledgeable
lenders. This designation streamlines the lending process by allowing the unit
to underwrite SBA loans independently and grant credit approval without prior
SBA review. For its first year in operation, which ended on September 30, 2001,
the department ranked second out of 66 approved lenders in the SBA's
Philadelphia District, booking 85 loans worth over $23 million. At December 31,
2001Government Guaranteed Lending had $10.7 million ($19.8 million gross of $9.1
million in participations sold) in commercial business loans.
TechBanc. The Bank established the Specialized Lending Division in
1996, in order to provide customized financial services to companies in the
technology, healthcare and insurance industries. In 2000, the Specialized
Lending Division was renamed TechBanc. TechBanc primarily focused on lending to
technology-based companies in the five county Philadelphia area, New Jersey,
Northern Delaware and the Baltimore, Maryland and Washington D.C. regions.
Generally, loans were originated with a balance of between $100,000 and $5.0
million.
During 2001, the Bank decided to exit the business of lending to
pre-profit companies and wind down the technology-based portfolio of loans to
pre-profit companies. Although TechBanc has significantly contributed to the
profitability of the Bank, exiting this business line allows the Bank to
dedicate its resources to more traditional lines of business which have a more
predictable earnings level including focusing on community banking. To comply
with the directive issued by the Office of Thrift Supervision to reduce lending
to early stage technology companies, the Bank entered into an agreement to sell
the technology lending group to Comerica. The sale closed in January 2002.
Approximately 25 commercial business loan relationships with balances totaling
$23.3 million were classified as loans held for sale to Comerica at December 31,
2001. The sale also included one loan relationship amounting to $2.3 million
which was classified as commercial real estate loans held for sale at December
31, 2001. Also included in the sale were related customer deposits and warrants
to purchase common stock of these companies.
At December 31, 2001, the Bank's TechBanc loan portfolio (excluding
loans held for sale) consisted of approximately 25 commercial business loan
relationships with an aggregate balance of $24.3 million outstanding; the
largest loan relationship had an outstanding balance of $5.7 million which was
paid off in February 2002.
In addition to providing financing, the Company often obtained an
equity position in the borrower in the form of warrants to purchase common stock
of the borrower. At December 31, 2001, the Company held warrants to purchase
common stock of 35 companies that were customers of TechBanc. Warrants to
purchase common stock of an additional 12 companies were included in the loans
held for sale to Comerica. The Company generally recognizes client warrant
income on such investments when such common stock is publicly traded and any
applicable restriction or lock-up period on the sale of the warrants or the
common stock expires. At December 31, 2001 there is no carrying value for client
warrants. There can be no assurance that the common stock of any of these
companies will become publicly traded or that the common stock will trade at or
above the warrant exercise price. As an incentive, 10% to 15% of any proceeds
realized from the warrants during each six-month period beginning in January and
July is contributed to an incentive pool to be paid to employees of TechBanc.
The incentive pool is reduced proportionately by the level of charge-offs the
Bank has realized from loans in the TechBanc portfolio during such six-month
period. This plan was terminated for any new warrants received by the Company
after January 1, 2001. No payments were made under this plan during 2001.
The following is a brief description of the only company in which the
Company held warrants at December 31, 2001 for which the underlying common stock
was publicly traded:
Axeda Systems Inc. ("Axeda") formerly Ravisent Technologies, Inc is a
DVD hardware and software company located in Malvern, Pennsylvania. The
Company holds warrants to purchase 50,000 shares of Axeda common stock
with an exercise price of $3.56 per share and an expiration of seven
years from the date of issue. Axeda went public
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at an initial offering price of $12.00 per share of common stock on
July 16, 1999. The trading of this stock, like many Internet companies,
is very volatile. Axeda closed at $3.50 per share on December 31, 2001.
Upon exercise of the warrant, the Company would be prohibited, under
General Rule 144 of the Securities Act of 1933, from selling or
otherwise disposing of the stock acquired for a period of 12 months.
Commercial Real Estate Lending. The Bank originates mortgage loans
secured by multi-family residential and commercial real estate. Commercial real
estate loans originated by the Bank are primarily secured by office buildings,
retail stores, warehouses and general-purpose industrial space. Commercial real
estate loans also include multi-family residential loans, substantially all of
which are secured by apartment buildings. Significant portions of such loans are
secured by owner-occupied properties and relate to borrowers that have an
existing banking relationship with the Bank. Within Commercial Real Estate
Lending, the Real Estate Capital Markets Lending Program enables the Bank to
provide its real estate clients with non-recourse, long-term, fixed-rate
alternatives for all major types of income properties located within and outside
of the normal geographical lending area.
At December 31, 2001, the Bank's commercial real estate loan portfolio
consisted of approximately 380 loans with an aggregate principal balance of
approximately $197.4 million which included two TechBanc loans held for sale to
Comerica of $2.3 million. The Bank's largest commercial real estate loan
customer had an outstanding balance of $5.7 million. Although terms vary,
commercial real estate loans secured by existing properties generally have
maturities of ten years or less and interest rates which adjust every one, three
or five years in accordance with a designated index.
At December 31, 2001, substantially all of the Bank's commercial real
estate loan portfolio was secured by properties located within the eastern
Pennsylvania and New Jersey market area. Loan-to-value ratios on the Bank's
commercial real estate loans are limited to 80% or lower, except in certain
limited circumstances. In addition, as part of the criteria for underwriting
permanent commercial real estate loans, the Bank generally imposes a debt
service coverage ratio (the ratio of net cash from operations before payment of
debt service to debt service) of at least 1.2x. It is also the Bank's general
policy to obtain personal guarantees of its commercial real estate loans from
the principals of the borrower.
Commercial real estate lending is generally considered to involve a
higher degree of risk than single-family residential lending. Such lending
typically involves large loan balances concentrated in a single borrower or
groups of related borrowers. In addition, the payment experience on loans
secured by income-producing properties is typically dependent on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the real estate market or in the economy
generally. The Bank generally attempts to offset the risks associated with
commercial real estate lending by, among other things, lending primarily in its
market area, periodically inspecting each property, using conservative
loan-to-value ratios in the underwriting process and obtaining financial
statements and rent rolls from all commercial and multi-family borrowers on at
least an annual basis.
The Company also conducts commercial mortgage banking and brokerage
services through Progress Realty Advisors, Inc. ("PRA"), a subsidiary of the
Bank, based in Shrewsbury, New Jersey. PRA was formed as a complement to the
Bank's commercial lending activities in order to provide lending services for
borrowers where borrowing needs are not consistent with the Bank's lending
operations due to, among other things, the amount of financing required,
geographic location of the borrower, recourse provisions and business/banking
relationships. PRA specializes in originating, underwriting and closing
commercial real estate financing for residential, multi-family and commercial
properties for other financial institutions, insurance and finance companies for
a fee.
Construction Lending. Through the Bank, the Company also offers both
residential construction loans and, to a lesser extent, commercial construction
loans. At December 31, 2001, the Company's construction loan portfolio consisted
of approximately 80 loans with an aggregate principal balance of approximately
$77.4 million and the Company's largest construction loan had an outstanding
balance of $18.6 million, of which $12.4 million was participated to other
financial institutions on a non-recourse basis.
Construction loans generally offer the potential for higher yields and
afford the Company the opportunity to increase the interest rate sensitivity of
its loan portfolio. Construction financing is generally considered to involve a
higher degree of risk of loss than long-term financing on improved,
owner-occupied real estate. Risk of loss on a construction loan is dependent in
large part upon the accuracy of the initial estimate of the property's value at
completion of construction or development, the estimated cost (including
interest) of construction and the financial strength of the borrower. During the
construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Company may be required to advance funds beyond the amount originally committed
to permit completion of the development. If the estimate of value proves to be
inaccurate, the Company may be confronted, at or prior to the maturity of the
loan, with a project having a value which is insufficient to assure full
repayment, in which case the Company would have to rely upon the borrower's
financial ability.
5
The Company generally attempts to address the additional risks
associated with construction lending by, among other things, lending primarily
in its market area, periodically inspecting each property during the
construction period, using conservative loan-to-value ratios in the underwriting
process and generally requiring personal guarantees. At December 31, 2001,
substantially all of the Company's construction loans were secured by properties
located within the Company's primary market area. In addition, residential
construction loans are generally made for 75% or less of the appraised value of
the property upon completion. For owner-occupied construction/permanent loans,
the Bank will lend up to 80% of the lesser of the full appraised value or the
land plus costs. Moreover, the Company does not originate loans for the
construction of speculative (or unsold) residential properties. Prior to making
a commitment to fund a construction loan, the Company requires both an appraisal
of the property by independent appraisers approved by the Board of Directors and
a study of the feasibility of the proposed project.
Construction loans, including land loans, generally have maturities of
12 to 24 months (up to three years in the case of land loans). Interest rates on
construction loans generally adjust in accordance with a designated index.
Advances are generally made to cover actual construction costs, and generally
include a reserve for paying the stated interest due on the loan during the life
of the loan. Loan proceeds are disbursed as inspections of construction progress
warrants and as pre-construction sale and leasing requirements generally imposed
by the Company are met.
Consumer Lending. Subject to restrictions contained in applicable
federal laws and regulations, the Bank is authorized to make loans for a wide
variety of personal or consumer purposes. At December 31, 2001 the Bank's
consumer loan portfolio consisted of approximately 1,800 loans with an aggregate
outstanding balance of $44.8 million.
The Bank has been emphasizing a variety of consumer loans in recent
years in order to provide a full range of financial services to its customers
and because such loans generally have shorter terms and higher interest rates
than traditional first mortgage loans. The consumer loans offered by the Bank
include home equity loans and lines of credit, deposit account secured loans and
loans that are secured by personal property, including automobiles.
Home equity loans are originated by the Bank for up to 90% of the
appraised value, less the amount of any existing prior liens on the property.
The Bank also offers home equity lines of credit in amounts up to 90% of the
appraised value, less the amount of any existing prior liens. Home equity loans
have a maximum term of 15 years, and the interest rate is dependent upon the
term of the loan. The Bank secures the loan with a mortgage on the property
(generally a second mortgage) and will originate the loan even if another
institution holds the first mortgage.
Consumer loans generally have shorter terms and higher interest rates
than mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. In addition, consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely effected by job loss, divorce, illness and personal bankruptcy. In
most cases, any repossessed collateral for a defaulted consumer loan will not
provide an adequate source of repayment of the outstanding loan balance. The
Company believes that the generally higher yields earned on consumer loans
compensate for the increased credit risk associated with such loans and that
consumer loans are important to its efforts to increase rate sensitivity,
shorten the average maturity of its loan portfolio and provide a full range of
services to its customers.
Equipment Leasing. The Company provides equipment leasing services primarily to
small- and medium-sized businesses. At December 31, 2001, the Company's lease
financing portfolio consisted of approximately 2,850 leases with an outstanding
balance of $37.6 million. This was a decrease of $18.6 million from the
outstanding balance at December 31, 2000 primarily due to the leasing operation
being de-emphasized as the result of the corporate simplification initiative. In
December 2000, the Company had sold its Maryland-based leasing division
resulting in the sale of $31.0 million of lease financing receivables.
Equipment lease financing is provided through the Bank's subsidiary,
Progress Leasing Company ("PLC") located in Blue Bell, Pennsylvania. The Company
provides leasing arrangements for essential-use equipment primarily to clients
within the market area. The origination of small ticket leases outside of the
market area has been eliminated. The Company provides lease financing for a wide
variety of business equipment, including computer systems, telephone systems,
furniture, landscaping and construction equipment, medical equipment, dry
cleaning equipment and graphic systems equipment.
For some of the Company's leases, the Company may retain the leased
property upon expiration of the lease based on the residual value, which
generally does not exceed 10% of the original cost. In the event that the
residual value is less than provided for in the lease, the Company may have a
loss related to the disposition of such property. However, because a majority of
the Company's leases are bought out or extended at the end of their terms, the
Company has not experienced any material losses in aggregate residual values to
date.
6
Private Equity Fund Management. Progress Capital Management, Inc. ("PCM"), a
subsidiary of the Company, previously managed Ben Franklin/Progress Capital
Fund, L.P. ("Ben Franklin") and NewSpring Ventures, L.P. ("NewSpring"). PCM
earned fees for managing these funds. At December 31, 2001, PCM exited the fund
management business as the Company continues to redirect its focus on community
banking and due to the sale of TechBanc relationships to Comerica.
The Ben Franklin Fund commenced operations in December 1997 and
provided subordinated debt financing to early-stage Mid-Atlantic based
technology companies. In addition, Ben Franklin generally received
warrants to purchase equity of the borrowers in connection with such
lending. The fund was closed for making new investments at December 31,
2001 and is distributing its proceeds to limited partners.
NewSpring, a $90 million equity Small Business Investment Company
formed in 1999, primarily invested in Mid-Atlantic companies with
significant growth potential, proven management and strategic
competitive advantage. PCM transferred the management of NewSpring on
December 31, 2001 to NewSpring Capital Management, Inc. which was
formed by the NewSpring operating partners. Additionally, as part of
the decision to exit the fund management business, the Company sold its
limited partnership interest in NewSpring to the Eastern Technology
Fund on December 31, 2001. The Company repurchased a 6.67 percent
limited partnership interest in NewSpring during the first quarter of
2002 which was required as part of the sale at December 31, 2001.
Insurance/Wealth Management. Progress Financial Resources, Inc. ("PFR"), a
subsidiary of the Company, commenced operations in January 1999. PFR, a Delaware
corporation headquartered in Philadelphia, Pennsylvania, is a comprehensive
wealth management company, serving high net-worth individuals, small business
owners and professionals. PFR offers investments, insurance, estate planning,
401 (k) plans, executive compensation planning and retirement planning services.
PFR offers securities and insurance products, primarily but not exclusively,
through AXA Advisors, LLC (New York, NY). During 2001, Progress Financial
Advisors was created to provide fee-based financial planning and business
advisory services such as estate planning, succession planning, executive
compensation plan design and investment management.
Other Activities. Progress Capital, Inc. ("PCI"), a subsidiary of the Company,
was formed in 1996 and is the corporate general partner of Ben Franklin and
hold's the Company's equity interest in Ben Franklin. PCI holds the equity
interest in NewSpring. PCI also holds several investments in other privately
held companies amounting to $1.9 million at December 31, 2001.
Progress Development Corp ("PDC") was formed by the Company in February
1998 to invest in a joint venture partnership, Progress Development I L.P.,
which had acquired an interest in NewSeasons Assisted Living Communities
("NewSeasons") with Independence Blue Cross. NewSeasons owns, acquires, develops
and operates assisted living residences for the elderly. In addition, Progress
Development I L.P. provided fee based development, construction management and
financial services to NewSeasons and other investors. During the first quarter
of 2001, the Company sold its investment in New Seasons Assisted Living
Communities Series B and C preferred stock and at December 31, 2001, the Company
sold its interest in Progress Development I. L.P. to Dewey Commercial Investors,
L.P. as the Company continues to redirect its focus to core banking business.
KMR Management, Inc. ("KMR"), a Pennsylvania based corporation, was
acquired by the Company in January 2000. KMR provides fee-based management
consulting services to companies that are in transition or crisis. Working
primarily for companies with up to $50 million in sales, KMR takes an active
role in short-term management of its clients' businesses. Given the
counter-cyclical nature of its business, KMR's services are in greater demand
during periods of economic downturn.
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Financial Information by Business Segment
The Company has four principal activities: Banking, Equipment Leasing,
Private Equity Fund Management and Insurance/Wealth Management. Emerging
operating segments not directly related to the four principal activities and
that do not currently meet the quantitative thresholds of a reportable segment
are aggregated under Other Segments. Intercompany business transactions, the
parent company and other non-operating segments are aggregated under Corporate.
The measurement of the performance of these business segments is based on the
Company's current management structure and is not necessarily comparable with
similar information for any other financial institution. The information
presented is also not necessarily indicative of each segment's financial
condition and results of operations if they were independent entities. The
following selected financial information by business segment is presented in
thousands of dollars:
Private Equity Insurance/
Equipment Fund Wealth Other
Banking Leasing Management Management Segments Corporate Total
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Assets at:
December 31, 2001 $ 803,588 $37,351 $ 10 $ 678 $ 1,175 $ 8,578 $ 851,380
December 31, 2000 842,901 54,886 114 1,640 1,176 13,532 914,249
Revenues for the year ended:
December 31, 2001 38,303 3,764 2,428 3,059 2,022 (1,852) 47,724
December 31, 2000 33,376 9,058 2,230 4,566 1,058 1,107 51,395
December 31, 1999 29,849 5,799 699 2,645 -- 5,337 44,329
Income from continuing operations
for the year ended:
December 31, 2001 4,536 (625) 335 (179) 24 (3,348) 743
December 31, 2000 4,531 2,088 349 52 (85) (1,278) 5,657
December 31, 1999 4,259 112 126 (189) -- 1,724 6,032
Competition
The Company faces strong competition both in attracting deposits and
making loans. As a provider of a wide range of financial services, the Company
competes with national and state banks, savings and loan associations,
securities dealers, brokers, mortgage bankers, finance and insurance companies,
and other financial service companies. The ability of the Company to attract and
retain deposits depends on its ability to generally provide a rate of return,
liquidity and risk comparable to that offered by competing investment
opportunities. The Company competes for loans principally through the interest
rates and loan fees it charges and the efficiency and quality of services it
provides borrowers.
REGULATION AND SUPERVISION
General
The Company, as a unitary thrift holding company, is subject to
comprehensive examination, supervision and regulation by the Office of Thrift
Supervision ("OTS"). Because the Company was a unitary savings and loan holding
company on May 4, 1999, it is generally not restricted in the types of
investments and activities it may engage in at the holding company and
non-savings association affiliate levels; the Bank is subject to certain
restrictions in its dealings with the Company and affiliates thereof. Three of
the Company's non-banking subsidiaries, KMR, PCM and PDC, are subject to the
laws of the Commonwealth of Pennsylvania. PCI and PFR are Delaware corporations.
The Bank
Lending Restrictions
As a federally chartered savings bank, the Bank is subject to certain
lending restrictions. Commercial business loans are limited to 20% of the Bank's
assets; there is no limitation on the guaranteed portion of Small Business
Association ("SBA") commercial loans. Mortgage loans secured by non-residential
properties are limited to four times the Bank's risk-based capital. Consumer
loans are subject to a limitation of 35% of the Bank's assets. Under federal
regulations financing leases are either considered loans, in which case are
accordingly classified as and aggregated with commercial, consumer or
agricultural loans based upon the underlying collateral or personal property, or
as operating leases which are subject to a
8
separate 10% of assets limitation. The Company's financing leases are considered
operating leases and are subject to the 10% limitation. At December 31, 2001,
the Bank was in compliance with all loan limitations.
The Bank is also limited, under federal regulation, in the amount it
can lend to one borrower. At December 31, 2001, the Bank's loans-to-one-borrower
limit was approximately $11.0 million. The Bank was in compliance with this
limitation at December 31, 2001.
Insurance of Deposits
The Bank's deposits are insured by the Savings Association Insurance
Fund ("SAIF") to a maximum of $100,000 for each depositor. The Federal Deposit
Insurance Corporation ("FDIC") requires an annual audit by independent
accountants and may also examine the Bank.
Federal law requires that the FDIC maintain the reserve level of each
of the SAIF and the Bank Insurance Fund ("BIF") at 1.25% of insured deposits.
Deposit insurance premiums in 2001 averaged 1.90 cents per $100 of deposits
compared to an average 2.07 cents per $100 of deposits in 2000 and 5.93 cents
per $100 of deposits in 1999. Deposit insurance is payable on a quarterly basis.
Qualified Thrift Lender Test
All savings associations are required to meet a qualified thrift lender
("QTL") test set forth in Section 10(m) of the Home Owners' Loan Act ("HOLA")
and regulations of the OTS thereunder to avoid certain restrictions on their
operations. A savings association qualifies as a QTL if it is a domestic
building and loan association under the Internal Revenue Code of 1986 or if 65%
or more of its "portfolio assets" (as defined) consist of certain housing, small
business, and consumer related assets on a monthly average basis in 9 out of
every 12 months.
The Bank complied with this test for 2001. At December 31, 2001,
approximately 67.47% of the Bank's assets were invested in qualified thrift
investments, which was in excess of the percentage required to qualify under the
QTL test.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank of Pittsburgh
("FHLB"), which administers the home financing credit function and serves as a
source of liquidity for member savings associations, commercial banks and other
eligible institutions within its assigned region. It makes loans to members
(i.e., advances) in accordance with policies and procedures established by its
Board of Directors. As of December 31, 2001, the Bank's advances from the FHLB
amounted to $117.0 million. As a member, the Bank is required to purchase and
maintain stock in the FHLB in an amount equal to the greater of 1% of its
mortgage related assets or .3% of total assets. At December 31, 2001, the Bank
had $6.5 million in FHLB stock, which was in compliance with this requirement.
Federal Limitations on Transactions with Affiliates
Transactions between a savings association and any affiliate are
governed by Section 23A and 23B of the Federal Reserve Act. In addition to the
restrictions imposed, no savings association may (i) loan or otherwise extend
credit to an affiliate, except for any affiliate which engages only in
activities which are permissible for bank holding companies, or (ii) purchase or
invest in any stocks, bonds, debentures, notes, or similar obligations of any
affiliate, except for affiliates which are subsidiaries of the savings
association.
In addition, 12 CFR Part 215 (Regulation O) of the Code of Federal
Regulations places restrictions on loans by the Bank to executive officers,
directors, and principal shareholders of the Company and the Bank. At December
31, 2001, the Bank was in compliance with this regulation.
Employees
As of December 31, 2001, the Company had a total of 306 full-time
equivalent employees. Employment at the Company's individual subsidiaries was as
follows: The Bank and its subsidiaries PLC and PRA had 264 full-time equivalent
employees; PFR had 31 full-time equivalent employees; PCM had 7 full-time
equivalent employees and KMR had 4 full-time equivalent employees.
9
Item 2. Properties
The Company's and the Bank's executive offices are located at 4 Sentry
Parkway, Suite 200, Blue Bell, Pennsylvania. The Bank conducts business from
nineteen Pennsylvania branch offices in Bridgeport, Plymouth Meeting, East
Norriton, Chestnut Hill, Conshohocken, Glenside, King of Prussia, Lansdale,
Norristown, Jeffersonville, Paoli, Lionville, Southampton, Trappe, Warrington,
Bensalem, Doylestown, Rosemont and the Andorra community of Philadelphia; six of
which are owned and thirteen are leased. Lambertville, NJ is our first New
Jersey branch. The location is leased. PLC conducts equipment-leasing business
in leased facilities in Blue Bell, PA. PRA has leased locations in Blue Bell, PA
and Shrewsbury, NJ. KMR has lease office space in Willow Grove, PA. PFR leases
its location in Philadelphia, PA and leases office space in Blue Bell, PA and
Northfield, NJ.
Item 3. Legal Proceedings
The Company is involved in routine legal proceedings occurring in the
ordinary course of business which management, after reviewing the foregoing
actions with legal counsel, is of the opinion that the liability, if any,
resulting from such actions will not have a material effect on the financial
condition or results of operations of the Company.
On August 29, 2001, a shareholder's derivative action was filed
against the Company and its directors in the Delaware Chancery Court alleging
failure to comply with the Home Owners' Loan Act, insider trading, and breach of
their fiduciary duty. The plaintiff demands judgment against the Company and its
directors for the amount of damages sustained by the Company as result of the
directors' breaches of fiduciary duty, awarding the plaintiff the costs and
disbursements of the actions, including expenses of the lawsuit and granting
such other and further relief as the Court may deem just and proper. The Company
believes that this action is without merit and is defending the action
vigorously. On December 7, 2001 the Company filed an Opening Brief and Motion to
Dismiss the Complaint, which the plaintiff filed an opposition to on January 25,
2002. On March 8, 2002 the Company filed a Reply Brief in support if its motion
to dismiss.
Item 4. Submissions of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Progress Financial Corporation's common stock is traded on The Nasdaq
Stock MarketSM under the symbol "PFNC." At December 31, 2001 the Company had
approximately 2,100 holders of record.
Payment of cash dividends is subject to regulatory restrictions as
described in Note 18 of Notes to Consolidated Financial Statements. The Company
paid cash dividends on a quarterly basis totaling $.12 per share for the first
two quarters of 2001 and $.21 per share during 2000.
The following table sets forth the high and low closing prices, trading
volumes and cash dividends per share paid for the periods described. Prior
periods have been restated to reflect the 5% stock dividend distributed to
shareholders on August 31, 2000.
2001 2000
------------------------------------- -----------------------------------------
Low High Volume Dividends Low High Volume Dividends
------------------------------------- -----------------------------------------
First Quarter $7.06 $9.63 1,057,900 $.06 $10.42 $12.26 1,299,000 $.05
Second Quarter 6.88 8.40 819,500 .06 10.12 11.84 933,000 .05
Third Quarter 5.60 7.94 629,200 -- 11.19 12.62 657,000 .05
Fourth Quarter 5.90 7.60 485,300 -- 7.13 10.75 861,000 .06
10
Item 6. Selected Consolidated Financial Data
Tabular information is presented in thousands of dollars except for share and
per share data. This data should be read in conjunction with the Notes to
Consolidated Financial Statements.
December 31, 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Financial Condition
Investment and mortgage-backed securities:
Available for sale $211,828 $205,166 $149,518 $164,368 $50,913
Held to maturity 38,173 41,940 34,309 12,401 53,472
Loans and leases, net 495,025 535,712 497,738 394,246 339,903
Loans held for sale 25,587 -- -- 25,250 373
Real estate owned, net 1,533 1,750 66 -- 380
Total assets 851,380 914,249 768,941 648,198 508,919
Deposits 629,523 617,543 521,439 408,162 344,322
Borrowings and subordinated debt 140,568 194,360 162,767 167,416 84,247
Capital securities 20,260 20,232 14,451 14,431 14,400
Shareholders' equity 50,599 50,160 47,809 41,554 25,362
Results of Operations
Interest income $ 64,985 $ 67,028 52,174 $ 45,329 $36,497
Interest expense 33,372 35,175 25,432 22,450 17,894
Net interest income 31,613 31,853 26,742 22,879 18,603
Provision for loan and lease losses 7,116 4,416 3,548 959 1,509
Net interest income after provision for loan and lease 24,497 27,437 23,194 21,920 17,094
losses
Non-interest income 16,111 19,542 17,587 7,645 5,950
Non-interest expense 39,563 38,306 31,648 21,834 17,332
Income from continuing operations before income taxes,
extraordinary loss and cumulative effect of accounting
change 1,045 8,673 9,133 7,731 5,712
Tax expense (benefit) 302 3,016 3,101 2,816 2,230
Income from continuing operations before extraordinary loss
and cumulative effect of accounting change 743 5,657 6,032 4,915 3,482
Gain on sale of discontinued operations, net of tax -- 1,519 -- -- --
Income from discontinued operations, net of tax -- 123 639 111 (15)
Income before extraordinary loss and cumulative effect of
accounting change 743 7,299 6,671 5,026 3,467
Extraordinary loss, net of tax benefit (199) -- -- -- --
Cumulative effect of accounting change, net of tax benefit -- -- -- (46) --
Net income 544 7,299 6,671 4,980 3,467
Per Share Data
Basic income from continuing operations per common share
before extraordinary loss and cumulative effect of
accounting change $ .13 $ .98 $ 1.04 $ .92 $ .74
Diluted income from continuing operations per common
share before extraordinary loss and cumulative effect of
accounting change .13 .95 .99 .84 .68
Basic net income per common share .10 1.26 1.15 .93 .74
Diluted net income per common share .10 1.22 1.10 .85 .68
Dividends .12 .21 .17 .12 .08
Book value 9.11 8.82 8.26 7.45 5.35
Operating Data
Return on average assets .06% .88% .98% .89% .80%
Return on average shareholders' equity 1.04 15.16 15.47 13.78 15.22
Average shareholders' equity to average assets 5.82 5.78 6.33 6.42 5.23
Allowance for loan and lease losses to total loans and 1.87 1.36 1.18 1.06 1.12
leases
Non-performing assets as a percentage of total assets 1.28 .63 .75 .57 .50
Interest rate spread 3.18 3.50 3.63 3.66 3.98
Net interest margin 3.79 4.17 4.24 4.32 4.58
Dividends declared as a percent of net income per share 120.00 17.21 15.45 14.12 11.76
Banking Office Data
Number of full service banking offices 20 16 14 11 10
11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Progress Financial Corporation (the "Company") is a unitary thrift
holding company that has six primary subsidiaries: Progress Bank (the "Bank"),
Progress Capital, Inc. ("PCI"), KMR Management, Inc. ("KMR"), Progress
Development Corp. ("PDC"), Progress Financial Resources, Inc. ("PFR") and
Progress Capital Management, Inc. ("PCM"). The Bank's primary operating
subsidiaries are Progress Leasing Company ("PLC") and Progress Realty Advisors,
Inc. ("PRA").
The following discussion and analysis of financial condition and
results of operations should be read in conjunction with the Company's
Consolidated Financial Statements and accompanying notes. Certain
reclassifications have been made to prior years' data throughout the following
discussion and analysis for comparability with 2001 data.
When used in filings by the Company with the Securities and Exchange
Commission, in the Company's press releases or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result", "are expected to",
"will continue", "is anticipated", "estimate", "project", or similar expressions
are intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties including changes in economic conditions in the
Company's market area, changes in policies by regulatory agencies, fluctuations
in interest rates, demand for loans in the Company's market area and competition
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made. The Company wishes to advise readers that
the factors listed above could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from any opinions or statements expressed with respect to future periods in any
current statements. These factors influence the Company's most critical
accounting policy, "Allowance for Loan and Lease Losses" and the related
"Provision for Possible Loan and Lease Losses," which are further discussed on
pages 13, 24 and 34 of this Form 10-K.
Results of Operations
The Company reported net income of $544,000 for the year ended December
31, 2001, in comparison with $7.3 million and $6.7 million for the years 2000
and 1999, respectively. The basic net income per common share was $.10 for 2001,
$1.26 for 2000 and $1.15 for 1999. Fully diluted net income per common share was
$.10 for 2001, $1.22 for 2000 and $1.10 for 1999. Income from continuing
operations was $743,000 for the year ended December 31, 2001, in comparison with
$5.7 million and $6.0 million for the years 2000 and 1999, respectively. During
the fourth quarter of 2001, the Company paid off $10.0 million of long-term
Federal Home Loan Bank borrowings resulting in an extraordinary loss on the
early extinguishment of debt of $301,000 pretax, $199,000 net of tax, or diluted
earnings per share of $.03. During the second quarter of 2000, the Company sold
the assets of Procall Teleservices, Inc., its teleservices operations, resulting
in a gain of $2.5 million pretax, $1.5 million net of tax, or diluted earnings
per share of $.25. Return on average shareholders' equity was 1.04% and return
on average assets was .06% for the year ended December 31, 2001. For 2000,
return on average shareholders' equity was 15.16% and return on average assets
was .88%. Return on average shareholders' equity was 15.47% and return on
average assets was .98% for 1999.
Net Interest Income
Net interest income on tax-equivalent basis remained level at $32.1
million for 2001, in comparison with $32.2 million for 2000. Although there was
a $15.1 million increase in the positive variance between average
interest-earning assets and average interest-bearing liabilities resulting from
higher volumes in mortgage-backed securities partially offset by increased
deposit volume, this was offset by the reduction in the net interest margin. The
net interest margin was 3.79% for 2001 compared to 4.17% for 2000. The margin
has been compressed by an environment of unprecedented decreases in short-term
rates during 2001 of 475 basis.
Net interest income on a tax-equivalent basis increased to $32.2
million for 2000, in comparison with $26.9 million for 1999. This was primarily
due to a $15.0 million increase in the positive variance between average
interest-earning assets and average interest-bearing liabilities resulting from
higher volumes in commercial business loans, commercial real estate loans, lease
financing receivables and investments which were partially offset by increased
time deposit volume and short-term borrowings. The net interest margin was 4.17%
for 2000 compared to 4.24% for 1999; the slight decline was primarily due to
higher deposit rates in 2000 partially offset by higher yields on commercial
business loans, construction loans and investments in 2000.
12
Provision for Loan and Lease Losses
The provision for loan and lease losses represents the charge against
earnings that is required to fund the allowance for loan and lease losses. The
level of the allowance is determined by known and inherent risks within the
Bank's loan and lease portfolio. Management's periodic evaluation is based upon
an examination of the portfolio, past loss experience, current economic
conditions and other relevant factors.
The provision for loan and lease losses amounted to $7.1 million in
2001 compared to $4.4 million in 2000. The increase was undertaken primarily due
to increases in classified loans, the level of charge-offs, non-performing
assets and continued economic concerns.
The provision for loan and lease losses amounted to $4.4 million in
2000 compared to $3.5 million in 1999. The increase was primarily due to loan
growth and to increase the reserve coverage as a result of the economic climate.
The ratio of the allowance for loan and lease losses to total
non-performing loans and leases was 106.28%, 183.61% and 103.96% at December 31,
2001, 2000 and 1999, respectively.
Although management utilizes its best judgment in providing for loan
and lease losses, there can be no assurance that the Bank will not have to
increase its provision for loan and lease losses in the future as a result of
adverse market conditions for real estate in the Bank's primary market area,
future increases in non-performing loans and leases, or for other reasons. Any
such increase could adversely affect the Bank's results of operations. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan and lease losses and
the carrying value of its other non-performing assets. Such agencies may require
the Bank to recognize additions to its allowance for losses based on their
judgements of information available to them at the time of their examination.
The Company and the Bank were most recently examined by the Office of Thrift
Supervision ("OTS") as of December 31, 2001.
Non-interest Income
Non-interest income decreased to $16.1 million in 2001, compared to
$19.5 million in 2000. This decrease was primarily due to the recognition of a
$1.9 million loss from client warrants during 2001 compared with a gain of $3.5
million during 2000, financial services fee income which decreased $1.2 million
and a gain on the sale of the Maryland-based leasing division of $1.7 million
during 2000 partially offset by gain on sale of securities which increased $2.3
million and loss in unconsolidated entities which decreased $2.2 million.
The Company recognized a loss of $1.9 million from client warrants
during the first quarter of 2001 due to the permanent impairment of equity
securities of U. S. Interactive, Inc. (USIT) received from warrants. USIT filed
for protection under the bankruptcy court during the first quarter of 2001. The
$1.9 million loss represents the amount which was previously included in client
warrant income during the first quarter of 2000 related to market appreciation
on these same warrants recorded in accordance with FASB 133.
The Company had previously obtained rights to acquire stock (in the
form of warrants) in certain clients as part of negotiated credit facilities.
The receipt of warrants did not change the loan covenants or other collateral
control techniques employed by the Company to mitigate the risk of a loan
becoming non-performing, and collateral requirements on loans with warrants were
similar to lending arrangements where warrants were not obtained. Additional
information on warrants held by the Company can be found under "Business--
Banking-TechBanc."
Mutual fund, annuity and insurance commissions decreased $1.5 million
from the Company's subsidiary PFR. Loan, brokerage and advisory fees decreased
$874,000 from the Company's subsidiary PRA. Partially offsetting these decreases
were consulting fees generated by the Company's subsidiary KMR which increased
$1.0 million.
Gain on sale of securities increased $2.3 million during 2001 primarily
due to increased sale and purchase activity related to the change in the
financial markets and included a $708,000 gain on the disposition of the
Company's investment in NewSeasons Assisted Living Communities Series B and C
stock.
The loss in unconsolidated entities of $634,000 in 2001 primarily
relates to a loss on its investment in the NewSpring Ventures capital fund of
which the Company owned 20% and was accounted for under the equity method. In
December 2001, the Company recorded a gain on the sale of investments in
unconsolidated entities of $802,000. The Company's subsidiary, PCI, sold its
limited partnership interest in the NewSpring Ventures capital fund resulting in
a gain of $964,000 representing the amount by which the Company had previously
written down its investment. The Company's subsidiary, PDC, sold its
13
interest in Progress Development I, L.P. resulting in a loss of $162,000.
Additional information can be found under "Business-- Private Equity Fund
Management and Other Activities."
Non-interest income increased to $19.5 million in 2000 compared to
$17.6 million in 1999. This increase was primarily due to a $4.9 million
increase in financial services fee income and a $1.7 million gain on the sale of
the Maryland-based leasing division partially offset by a $5.3 million decrease
in equity in unconsolidated entities.
Private equity fund management fees increased $1.5 million primarily
generated by the Company's subsidiary PCM. Mutual fund, annuity and insurance
commissions increased $1.9 million from the Company's subsidiary PFR. Consulting
fees of $963,000 were generated during 2000 by the Company's subsidiary KMR.
In December 2000, the Company sold the assets of its Maryland-based
leasing division that resulted in the sale of $31.0 million of lease financing
receivables and a gain of $1.7 million.
The losses in unconsolidated entities of $2.8 million in 2000 primarily
relate to the Ben Franklin mezzanine debt fund and NewSpring Ventures capital
fund of which the Company owned approximately 36% and 20%, respectively, and
which were accounted for under the equity method. These losses represent a
partial reversal of unrealized gains reported in the third and fourth quarters
of 1999.
The Company recognized $3.5 million of client warrant income during
2000 due to the expiration of restrictions on the sale of warrants to acquire
common stock of Internet Capital Group, Inc. (ICGE), USIT and EMAX Solutions
Partners, Inc. The Company recognized client warrant income of $1.1 million from
the sale of and market value adjustments on shares of ICGE; $2.0 million from
market value adjustments on USIT warrants and $340,000 was on the sale of EMAX
warrants back to SciQuest.com in accordance with the terms of the acquisition of
EMAX by SciQuest.com.
A gain on sale of securities of $603,000 was recorded during 2000 from
the sale of 49,412 shares (adjusted for a 2-for-1 split) of common stock of ICGE
which the Company acquired through an investment in a convertible note of ICGE
made by it venture capital subsidiary.
Non-interest Expense
Non-interest expense for 2001 amounted to $39.6 million compared to
$38.3 million in 2000. Excluding non-recurring expenses of $1.1 million in 2001
and non-recurring expenses of $626,000 in 2000, non-interest expense increased
$799,000. The non-recurring expenses for 2001 primarily included write-offs
related to PLC, including a goodwill write-off of $440,000 and a write-down of
used asset inventory for $422,000. Non-recurring expenses for 2000 included a
write-down of goodwill associated with the AMIC Division of PRA of $373,000 and
data processing conversion costs of $253,000. Professional services expenses
increased $1.2 million primarily due to the business activities of KMR and legal
expenses related to loans to pre-profit companies. Occupancy expense increased
$239,000 in 2001 mainly due to the establishment of four new banking offices.
Capital securities expense increased $371,000 due to the issuance of $6.0
million of 11.445% capital securities in July 2000. Salaries and employee
benefits decreased $1.0 million in 2001 mainly due to lower commission expense
for PFR.
Non-interest expense for 2000 amounted to $38.3 million compared to
$31.6 million in 1999. Excluding non-recurring expenses of $253,000 during 2000
related to data system conversion costs, a $373,000 write-down of goodwill
during 2000 related to the sale of offices of the AMIC Division of PRA, and $1.1
million in 1999 associated with a leasing acquisition and unrelated adjustments,
non-interest expense increased $7.1 million. This increase was partially due to
a $4.3 million increase in salaries and employee benefits as a result of
additional employees to staff new banking offices, the acquisition of KMR, the
staffing of PCM, commissions at PFR and from other new positions established
within the Company. Occupancy and furniture, fixtures and equipment expenses
increased $1.5 million mainly due to a new operations center, bringing data
processing in-house and new bank office openings. Professional services expense,
excluding $31,000 in data system conversion related expenses in 2000, increased
$492,000 primarily due to consulting costs associated with the business
generated by the Company's subsidiaries PCM and KMR and legal costs associated
with aggressive collection efforts on charged-off loans and leases. Real estate
owned expenses increased $287,000 primarily due to construction management and
legal expenses related to residential real estate development projects,
classified as real estate owned. Loan expenses increased $221,000 primarily due
to lease financing broker fees. Capital securities expense increased $312,000
due to the issuance of $6.0 million of 11.455% capital securities in July 2000.
14
Income Tax Expense
The Company recorded income tax expense from continuing operations of
$302,000 during 2001 compared to $3.0 million in 2000 and $3.1 million in 1999.
Income tax benefit from the extraordinary loss on early extinguishment of debt
was $102,000 during 2001. Income tax expense from the gain on sale of and income
from discontinued operations was $1.1 million during 2000. Income tax expense on
income from discontinued operations was $442,000 in 1999. The changes in income
tax expense were primarily due to changes in taxable income.
Liquidity and Funding
The Company must maintain sufficient liquidity to meet its funding
requirements for loan and lease commitments, scheduled debt repayments,
operating expenses, and deposit withdrawals. The Bank is the primary source of
working capital for the Company. At December 31, 2001, the Bank met all
regulatory capital liquidity requirements.
The Company's need for liquidity is affected by loan demand and net
changes in retail deposit levels. The Company can minimize the cash required
during the times of heavy loan demand by modifying its credit policies or
reducing its marketing efforts. Liquidity demand caused by net reductions in
retail deposits is usually caused by factors over which the Company has limited
control. The Company derives its liquidity from both its assets and liabilities.
Liquidity is derived from assets by receipt of interest and principal payments
and prepayments, by the ability to sell assets at market prices and by utilizing
unpledged assets as collateral for borrowings. Liquidity is derived from
liabilities by maintaining a variety of funding sources, including retail
deposits, FHLB borrowings and securities sold under agreement to repurchase.
At December 31, 2001, the total of approved loan commitments amounted
to $23.3 million, and the Company had $156.1 million of undisbursed loan funds.
At December 31, 2001, the amount of time deposits that are scheduled to mature
within 12 months totaled $280.1 million, a substantial portion of which
management believes, on the basis of prior experience, will remain in the
Company.
Deposits are obtained primarily from residents near the Bank's ten
full-service offices in Montgomery County, one full-service office in Rosemont,
Delaware County, two full-service offices in Chester County, four full-service
offices in Bucks County, two full-service offices in Philadelphia County and one
full-service office in Lambertville, Hunterdon County, New Jersey. The Bank has
drive-up banking facilities at thirteen of its offices and has installed ATM's
at all of its offices and at four additional locations. The Bank offers a wide
variety of options to its customer base, including consumer and commercial
demand deposit accounts, negotiable order of withdrawal ("NOW") accounts, money
market accounts, passbook accounts, certificates of deposit and retirement
accounts.
As a member of the FHLB, the Bank is required to own capital stock in
the FHLB and is authorized to apply for advances on the security of such stock
and certain of its home mortgages and other assets (principally securities which
are obligations of, or guaranteed by, the United States), provided certain
standards related to creditworthiness have been met. Advances are made pursuant
to several different credit programs. Each credit program has its own interest
rate and range of maturities. Depending on the program, limitations on the
amount of advances are based either on a fixed percentage of a savings bank's
assets or on the FHLB's assessment of the savings bank's creditworthiness. The
FHLB credit policies may change from time to time at its discretion. The Bank's
maximum borrowing authority from the FHLB on December 31, 2001 was approximately
$271.0 million.
The Company's primary sources of funds have historically consisted of
deposits, amortization and prepayments of outstanding loans, FHLB borrowings and
securities sold under agreement to repurchase and sales of investment and
mortgage-backed securities. During 2001, the Company used its working capital
primarily to meet its ongoing commitments to fund existing and continuing loan
commitments, repay short-term debt, fund deposit withdrawals and maintain its
liquidity. During 2000, the Company used its capital resources primarily to meet
its ongoing commitments to fund existing and continuing loan commitments, fund
deposit withdrawals and maintain its liquidity. For the year ended December 31,
2001, cash was used in operating activities primarily for the payment of other
liabilities including a trade-date accounting entry for the purchase of
mortgage-backed securities. Cash was provided by investing activities primarily
due to the sales of and repayments on mortgage-backed securities, partially
offset by purchases of mortgage-backed securities. Cash was used in financing
activities during 2001 primarily due to a net decrease in short-term borrowings.
For the year ended December 31, 2000, cash was provided by operating activities.
Cash was used in investing activities as purchases of mortgage-backed and
investment securities, and net originations of loans exceeded repayments and
proceeds from sales, maturities and calls of mortgage-backed and investment
securities and proceeds from sales of loans, lease receivables and the
Maryland-based leasing division. Cash provided by financing activities during
2000, primarily due to increases in deposits, offset the outflows from
investments
15
activities. For the year ended December 31, 1999, cash was provided by operating
activities. Cash was used in investing activities primarily due to net
origination of loans. Cash provided by financing activities, primarily due to
increases in time deposits, offset the outflows from investment activities.
Office of Thrift Supervision Directive
During July 2001, the Company's Board of Directors approved a
resolution to comply with the terms of a directive issued by the Office of
Thrift Supervision ("OTS") that requires the Bank to (i) reduce its lending to
early stage technology companies; (ii) increase its leverage capital ratio to no
less than 8.0% and its total risk-basked capital ratio to no less than 14.0% by
April 1, 2002 through gradual compliance; (iii) increase its valuation allowance
and implement improved credit review and monitoring programs and (iv) beginning
on March 31, 2002, the Bank's classified assets-to-capital ratio shall not
exceed 20% through gradual compliance. In addition, the Company will not pay
cash dividends on its capital stock until the Bank achieves the required capital
levels and has implemented an acceptable capital plan. As such, the Company has
suspended the quarterly cash dividend on its common stock and its stock
repurchase program and has undertaken measures to achieve capital compliance as
promptly as possible. The increased capital levels reflect the Bank's level of
business lending particularly in the technology sector and continued economic
concerns. As of December 31, 2001 the Bank was in compliance with the terms of
the OTS Directive.
On February 7, 2002 the OTS approved the Company's revised Capital
Enhancement Plan and agreed to extend the dates that the Bank must comply with
the targeted ratio of classified assets to capital. As revised, the Bank's
classified assets to capital ratio must not exceed 25% on June 30, 2002 and must
not exceed 20% on September 30, 2002. At December 31, 2001, the Bank's
classified assets to capital ratio was approximately 36.0%. The Bank is working
aggressively to reduce the ratio and comply with the terms of the directive; but
there can be no assurance that the Bank will be in compliance with these
requirements on such dates. Failure to comply with such ratios could result in
the OTS taking further regulatory action.
Capital Resources
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was signed into law on December 19, 1991; regulations implementing
the prompt corrective action provision of FDICIA became effective on December
19, 1992. In addition to the prompt corrective action requirements, FDICIA
includes significant changes to the legal and insured depository institutions,
including reductions in insurance coverage for certain kinds of deposits,
increased supervision by the federal regulatory agencies, increased reporting
requirements for insured institutions, and new regulations concerning internal
controls, accounting, and operations. The prompt corrective action regulations
defined specific capital categories based on an institution's capital ratios.
The capital categories, in declining order, are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." To be considered "well capitalized," an
institution must generally have a tangible equity ratio of at least 2%, a Tier 1
or leverage capital ratio of at least 5%, a Tier 1 risk-based capital ratio of
at least 6%, and a total risk-based capital ratio of at least 10%. An
institution is deemed to be "critically undercapitalized" if it has a tangible
equity ratio of 2% or less. Under the OTS directive discussed above, the Bank
must increase its leverage capital ratio to no less than 8.0% and its total
risk-based capital ratio to no less than 14.0% by April 1, 2002 through gradual
compliance.
At December 31, 2001, the Bank met all regulatory capital requirements.
At December 31, 2001, the Bank's leverage capital ratio was 7.90%, Tier 1
risk-based capital ratio was 11.60%, total risk-based ratio was 12.85% and
tangible equity ratio was 7.88%, based on leverage capital of $66.4 million,
Tier 1 risk-based capital of $66.4 million, total risk-based capital of $73.4
million, and tangible capital of $66.2 million, respectively. As of December 31,
2001, the Bank is classified as "well capitalized."
In July 2000, the Company issued 6,000 shares, or $6.0 million, of
11.445% trust preferred securities, $1,000 liquidation amount per security, due
July 19, 2030 (the "Trust Preferred Securities"), in a private offering managed
by First Union Securities, Inc. The Trust Preferred Securities represent
undivided beneficial interests in Progress Capital Trust II (the "Trust II"), a
statutory business trust created under the laws of Delaware, which was
established by the Company for the purpose of issuing the Trust Preferred
Securities. The Company has fully, irrevocably and unconditionally guaranteed
all of the Trust II's obligations under the Trust Preferred Securities. Net
proceeds from the sale of the securities were used for general purposes,
including but not limited to, capital contributions to the Bank to fund its
growth and for repurchases of the Company's common stock under its existing
stock repurchase program.
During 1997 the Company issued $15.0 million of 10.5% capital
securities due June 1, 2027 (the "Capital Securities"). The Capital Securities
were issued by the Company's recently formed subsidiary, Progress Capital Trust
I, a statutory business trust created under the laws of Delaware. The Company is
the owner of all of the common securities of the Trust (the "Common
Securities"). The Trust issued $15.0 million of 10.5% Capital Securities (and
together with the Common
16
Securities, the "Trust Securities"), the proceeds from which were used by the
Trust, along with the Company's $464,000 capital contribution for the Common
Securities, to acquire $15.5 million aggregate principal amount of the Company's
10.5% Junior Subordinated Deferrable Interest Debentures due June 1, 2027 (the
"Debentures"), which constitute the sole assets of the Trust. The Company has,
through the Declaration of Trust establishing the Trust, Common Securities and
Capital Securities Guarantee Agreements, the Debentures and a related Indenture,
taken together, fully irrevocably and unconditionally guaranteed all of the
Trust's obligations under the Trust Securities. The Company contributed
approximately $6.0 million of the net proceeds to Progress Bank, to increase its
regulatory capital ratios and support the growth of the expanded lending
operations. Net proceeds retained by the Company will be used for general
purposes, including investments in other subsidiaries and potential future
acquisitions.
Subsequently, on February 11, 2002, the Company closed a private
placement offering of common stock to accredited investors of 1,153,330 common
shares priced at $7.50 a share, totaling $8.6 million, resulting in net proceeds
of approximately $8.3 million. The Company contributed $4.2 million of the net
proceeds to the Bank to increase its regulatory capital ratios and to position
the Company for strong, solid growth as it continues to focus on community
banking strategy in 2002. The Company is in compliance with the capital targets
set forth in the directive.
Statistical Information
Statistical information is furnished pursuant to the requirements of
Guide 3 (Statistical Disclosure by Bank Holding Companies) promulgated under the
Securities Act of 1933. Tabular information is provided in thousands of dollars
except for share and per share data.
17
Distribution of Average Assets, Liabilities and Shareholders' Equity
The following table sets forth, for the periods indicated,
tax-equivalent information regarding (i) the total dollar amount of interest
income on average interest-earning assets and the resultant average yield; (ii)
the total dollar amount of interest expense on average interest-bearing
liabilities and the resultant average cost; (iii) net interest income; (iv)
interest rate spread; and (v) net interest margin. Information is based on
average daily balances during the indicated periods. For the purposes of this
table, non-accrual loans have been included in the appropriate average balance
category.
For the years ended December 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------------------
Interest-earning assets:
Interest-earning deposits $25,606 $ 945 3.69% 21,244 $1,320 6.21% $16,907 $ 868 5.13%
Securities:
Trading securities -- -- -- 264 -- -- 86 -- --
Taxable investment securities(1) 33,769 2,127 6.30 50,709 3,507 6.92 30,127 1,863 6.18
Tax-exempt investment 14,850 1,156 7.78 14,820 923 6.23 10,068 687 6.82
securities(2)
Mortgage-backed securities (1) 218,012 13,935 6.39 145,056 10,461 7.21 123,786 8,008 6.47
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total securities 266,631 17,218 6.46 210,849 14,891 7.06 164,067 10,558 6.44
Loans:
Commercial business loans(2)(3) 175,959 14,642 8.32 146,332 13,801 9.43 103,934 8,862 8.53
Commercial real estate loans(2)(3) 190,313 16,191 8.51 170,180 14,980 8.80 146,784 12,652 8.62
Construction loans 69,889 6,075 8.69 54,435 5,944 10.92 50,161 5,062 10.09
Single family residential real 31,312 2,633 8.41 39,078 2,991 7.65 45,656 3,329 7.29
estate loans
Consumer loans 40,714 2,994 7.35 37,538 3,049 8.12 31,083 2,449 7.88
Lease financing(2) 45,518 4,750 10.44 93,615 10,446 11.16 76,861 8,600 11.19
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total loans 553,705 47,285 8.54 5 41,178 51,211 9.46 454,479 40,954 9.01
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-earning
assets 845,942 65,448 7.74 7 73,271 67,422 8.72 635,453 52,380 8.24
-------- ------- ----- -------- ------- ----- -------- ------- -----
Non-interest-earning assets:
Cash 16,568 16,762 14,091
Allowance for loan and lease losses (8,956) (6,263) (4,924)
Other assets 42,273 49,535 36,237
-------- -------- --------
Total non-interest-
earning assets 49,885 60,034 45,404
-------- -------- --------
Total assets $895,827 833,305 $680,857
======== ======== ========
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and Super NOW $113,406 2,844 2.51 91,975 3,119 3.39 $79,206 2,195 2.77
Money market accounts 42,382 1,112 2.62 37,223 1,172 3.15 35,649 993 2.79
Passbook and statement savings 28,892 425 1.47 29,752 527 1.77 31,763 603 1.90
Time deposits 364,891 19,016 5.21 329,874 19,344 5.86 248,866 12,968 5.21
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing 549,571 23,397 4.26 488,824 24,16 24.94 395,484 16,759 4.24
deposits
Short-term borrowings 36,513 1,759 4.82 76,515 4,707 6.15 35,340 2,199 6.22
Long-term debt 145,566 8,216 5.64 108,752 6,306 5.80 120,400 6,474 5.38
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities 731,650 33,372 4.56 674,091 35,175 5.22 551,224 25,432 4.61
-------- ------- ----- -------- ------- ----- -------- ------- -----
Non-interest-bearing liabilities:
Non-interest-bearing deposits 77,352 72,626 57,514
Other liabilities 14,440 20,652 14,547
-------- -------- --------
Total non-interest-bearing
liabilities 91,792 93,278 72,061
-------- -------- --------
Total liabilities 823,442 767,369 623,285
Capital securities 20,245 17,795 14,441
Shareholders' equity 52,140 48,141 43,131
-------- -------- --------
Total liabilities, capital
securities and shareholders'
equity $895,827 833,305 $680,857
======== ======== ========
Net interest income $32,076 $32,247 $26,948
======= ======= =======
Interest rate spread (4) 3.18% 3.50% 3.63%
Effect of net interest-free funding
sources(5) .61 .67 .61
----- ----- -----
Net interest margin (6) 3.79% 4.17% 4.24%
====== ====== =====
Average interest-earning assets to
average interest-bearing liabilities 115.6% 114.7% 115.2%
====== ====== =====
(1) Includes investment and mortgage-backed securities classified as available
for sale. Yield information does not give effect to changes in fair values
that are reflected as a component of shareholders' equity.
(2) Interest income and rates are presented on a tax-equivalent basis, assuming
a federal income tax rate of 34%.
(3) Includes loans held for sale.
(4) Represents the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities.
(5) Represents the effect on the net interest margin of the difference between
non-interest-earning assets and non-interest-bearing liabilities, capital
securities and shareholders' equity.
(6) Represents net interest income divided by average interest-earning assets.
18
Rate/Volume Analysis
The following table presents the degree to which changes in the
Company's tax-equivalent interest income, interest expense and net interest
income are attributable to changes in the average amount of interest-earning
assets and interest-bearing liabilities outstanding and/or to changes in rates
earned or paid thereon. The net change attributable to both volume and rate has
been allocated proportionately. Amounts in brackets represent a decrease in
interest income or expense.
--------------------------------------------------------------------------------------------------------
For the years ended December 31, 2001 vs. 2000 2000 vs. 1999
--------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
-------------------------------------------------------------------
Interest-earning assets:
Interest-earning deposits $ 234 ($609) ($375) $248 204 $ 452
Securities:
Trading securities -- -- -- -- -- --
Taxable investment
securities (1,088) (292) (1,380) 1,399 245 1,644
Tax-exempt securities 2 231 233 299 (63) 236
Mortgage-backed securities 4,773 (1,299) 3,474 1,473 980 2,453
------ ----- ------ ----- ----- ------
Total securities 3,687 (1,360) 2,327 3,171 1,162 4,333
Loans:
Commercial business 2,586 (1,745) 841 3,925 1,014 4,939
Commercial real estate
loans 1,720 (509) 1,211 2,059 269 2,328
Construction loans 1,488 (1,357) 131 449 433 882
Single family residential
real estate loans (635) 277 (358) (496) 158 (338)
Consumer loans 247 (302) (55) 523 77 600
Lease financing (5,061) (635) (5,696) 1,869 (23) 1,846
------ ----- ------ ----- ----- ------
Total loans 345 (4,271) (3,926) 8,329 1,928 10,257
--------------------------------------------------------------------------------------------------------
Interest income 4,266 (6,240) (1,974) 11,748 3,294 15,042
--------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
NOW and Super NOW 636 (911) (275) 387 537 924
Money market accounts 151 (211) (60) 46 133 179
Passbook and statement
savings (15) (87) (102) (37) (39) (76)
Time deposits 1,937 (2,265) (328) 4,609 1,767 6,376
------ ----- ------ ----- ----- ------
Total deposits 2,709 (3,474) (765) 5,005 2,398 7,403
Short-term borrowings (2,085) (863) (2,948) 2,533 (25) 2,508
Long-term debt 2,088 (178) 1,910 (653) 485 (168)
--------------------------------------------------------------------------------------------------------
Interest expense 2,712 (4,515) (1,803) 6,885 2,858 9,743
--------------------------------------------------------------------------------------------------------
Net interest income $ 1,554 ($1,725) ($ 171) $ 4,863 436 $5,29
========================================================================================================
Investment and Mortgage-Backed Securities
Investment and mortgage-backed securities are comprised of the
following at December 31, 2001, 2000 and 1999:
Held to Maturity Available for Sale
-----------------------------------------------
Amortized Estimated Amortized Estimated
December 31, 2001 Cost Fair Value Cost Fair Value
----------------------------------------------------------------------------------------------------
FHLB stock $ 6,500 $ 6,500 $ -- $ --
U.S. agency obligations 16,808 16,719 2,770 2,774
Bank deposits -- -- 440 440
Corporate bonds -- -- 1,919 1,545
Municipal bonds 14,865 14,801 -- --
Equity investments -- -- 1,923 1,923
Mortgage-backed securities -- -- 205,741 205,146
----------------------------------------------------------------------------------------------------
Total investment and mortgage-backed securities $ 38,173 $ 38,020 $212,793 $211,828
====================================================================================================
19
Held to Maturity Available for Sale
--------------------------------------------------
Amortized Estimated Amortized Estimated
December 31, 2000 Cost Fair Value Cost Fair Value
- --------------------------------------------------------------------------------------------------------------------
FHLB stock $ 6,350 $ 6,350 $ -- $ --
U.S. agency obligations 20,755 19,230 16,524 16,687
Bank deposits -- -- 447 447
Corporate bonds -- -- 1,913 1,570
Municipal bonds 14,835 14,645 -- --
Equity investments -- -- 5,436 2,994
Mortgage-backed securities -- -- 183,475 183,468
- --------------------------------------------------------------------------------------------------------------------
Total investment and mortgage-backed securities $41,940 $40,225 $207,795 $205,166
====================================================================================================================
Held to Maturity Available for Sale
--------------------------------------------------
Amortized Estimated Amortized Estimated
December 31, 1999 Cost Fair Value Cost Fair Value
- --------------------------------------------------------------------------------------------------------------------
FHLB stock $ 4,923 $ 4,923 $ -- $ --
U.S. agency obligations 14,581 14,255 17,107 16,777
Corporate bonds -- -- 1,900 1,693
Municipal bonds 14,805 13,736 -- --
Equity investments -- -- 4,564 12,162
Mortgage-backed securities -- -- 123,958 118,886
- --------------------------------------------------------------------------------------------------------------------
Total investment and mortgage-backed securities $34,309 $32,914 $147,529 $149,518
====================================================================================================================
The following table sets forth the contractual maturities of the
investment and mortgage-backed securities at December 31, 2001 by investment
type and the weighted average yield for each range of maturities. The yield on
municipal bonds is calculated on a tax-equivalent basis.
US
Government Business Weighted
Agencies Corporations Municipalities Total Average Yield
- ------------------------------------------------------------------------------------------------------------------------
Available for sale:
Due one year or less $ 1,770 $ 450 $ -- $ 2,220 2.29%
Due after one year through 5 years 1,004 -- -- 1,004 6.05
Due after 5 years through 10 years -- -- -- -- --
Due after 10 years -- 1,535 -- 1,535 3.03
Mortgage-backed securities 205,146 -- -- 205,146 6.93
Equity securities -- 1,923 -- 1,923 .22
- ------------------------------------------------------------------------------------------------------------------------
Total available for sale $ 207,920 $3,908 $ -- $211,828 6.79%
========================================================================================================================
Held to maturity:
Due after 5 years through 10 years $ -- $ -- $ 787 $ 787 6.83%
Due after 10 years 16,808 -- 14,078 30,886 7.27
FHLB stock 6,500 -- -- 6,500 5.75
- ------------------------------------------------------------------------------------------------------------------------
Total held for sale $ 23,308 $ -- $14,865 $ 38,173 7.00%
========================================================================================================================
Loan and Lease Portfolio
The principal categories in the Company's loan and lease portfolio are
commercial business loans; commercial real estate loans, which are secured by
multi-family (over five units) residential and commercial real estate; loans for
the construction of single-family, multi-family and commercial properties,
including land acquisition and development loans; residential real estate loans,
which are secured by single-family (one to four units) residences; consumer
loans; and lease financing. Substantially all of the Company's mortgage loan
portfolio consists of conventional mortgage loans, which are loans that are
neither insured by the Federal Housing Administration nor partially guaranteed
by the Department of Veterans Affairs.
20
The Company's net loan and lease portfolio, including loans held for
sale, totaled $520.6 million at December 31, 2001 or 61.1% of its total assets,
a decrease of $15.1 million or 2.8% from the $535.7 million outstanding at
December 31, 2000.
The following table depicts the composition of the Company's loan and
lease portfolio, net of unearned income, at December 31 for the years indicated:
At December 31, 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------------------------------------------------------------------------------------------------------
Commercial business(1) $146,844 27.68% $175,972 32.40% $119,807 23.79% $ 92,737 21.87% $ 69,312 20.14%
Commercial real
estate(2) 197,394 37.21 178,874 32.93 162,588 32.28 134,380 31.69 109,938 31.94
Construction 77,380 14.58 60,172 11.08 58,813 11.68 44,546 10.51 26,695 7.76
Single family 5.00
residential mortgage(3) 26,518 34,676 6.39 40,554 8.05 50,086 11.81 56,565 16.44
Consumer loans 44,821 8.45 37,242 6.86 34,918 6.93 28,738 6.78 25,557 7.43
Lease financing 37,572 7.08 56,183 10.34 86,985 17.27 73,499 17.34 56,072 16.29
------------------------------------------------------------------------------------------------------
Total loans and
leases 530,529 100.00% 543,119 100.00% 503,665 100.00% 423,986 100.00% 344,139 100.00%
====== ====== ====== ====== ======
Allowance for loan and
Lease losses (9,917) (7,407) (5,927) (4,490) (3,863)
-------- ------- -------- -------- --------
Net loans and
leases $520,612 $535,712 $497,738 $419,496 $340,276
======== ======== ======== ======== ========
(1) Includes $23.3 million of loans classified as held for sale at December 31,
2001.
(2) Includes $2.3 million and $25.3 million of loans classified as held for
sale at December 31, 2001 and 1998, respectively.
(3) Includes $373,000 of loans classified as held for sale at December 31, 1997.
The following table sets forth the scheduled contractual maturities of
the Company's commercial loans at December 31, 2001. The following table also
sets forth the dollar amount of commercial loans scheduled to mature after one
year which have fixed or adjustable rates. Loans held for sale are included in
the one year or less category.
- ------------------------------------------------------------------------------------------------------
Commercial Commercial
At December 31, 2001 Mortgage Construct Business
- ------------------------------------------------------------------------------------------------------
Amounts due:
One year or less $ 18,432 $48,959 $ 87,305
After one year through five years 39,102 28,421 44,773
Beyond five years 139,860 -- 14,766
- ------------------------------------------------------------------------------------------------------
Total $197,394 $77,380 $146,844
======================================================================================================
Interest rate terms on amounts due after one year:
Fixed $ 84,642 $ -- $ 25,885
- ------------------------------------------------------------------------------------------------------
Adjustable $ 94,320 $28,421 $ 33,654
- ------------------------------------------------------------------------------------------------------
Scheduled contractual principal repayments do not reflect the actual
maturities of commercial loans. The average maturity of commercial loans is less
than their average contractual terms because of prepayments and refinancings.
The average life of mortgage loans tends to increase when current mortgage loan
rates are higher than rates on existing mortgage loans and, conversely, decrease
when rates on existing mortgages are lower than current mortgage loan rates (due
to refinancing of adjustable-rate and fixed-rate loans at lower rates). Under
the circumstances, the weighted average yield on loans decreases as higher
yielding loans are paid or refinanced at lower rates.
Risk Elements
The following table details the Company's underperforming assets at
December 31 for the years indicated:
- --------------------------------------------------------------------------------------------------------------
At December 31, 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Loans and leases accounted for on a non-accrual basis $ 9,331 $ 4,034 $5,701 $3,683 2,179
REO, net of related reserves 1,533 1,750 66 -- 380
- --------------------------------------------------------------------------------------------------------------
Total non-performing assets 10,864 5,784 5,767 3,683 2,559
Accruing loans 90 or more days past due 1,125 4,502 2,336 4,030 2,721
- --------------------------------------------------------------------------------------------------------------
Total underperforming assets $11,989 $10,286 $8,103 $7,713 5,280
- --------------------------------------------------------------------------------------------------------------
Non-performing assets as a percentage of net loans and leases
and real estate owned 2.08% 1.08% 1.16% .88% .75%
==============================================================================================================
Non-performing assets as a percentage of total assets 1.28% .63% .75% .57% .50%
==============================================================================================================
Underperforming assets as a percentage of net loans and
leases and real estate owned 2.30% 1.91% 1.63% 1.84% 1.55%
==============================================================================================================
Underperforming assets as a percentage of total assets 1.41% 1.13% 1.05% 1.19% 1.04%
==============================================================================================================
21
Gross interest income that would have been recorded during 2001, 2000
and 1999 if the Company's non-accrual loans and leases at the end of such
periods had been performing in accordance with their terms during such periods
was $811,000, $351,000 and $637,000, respectively. The amount of interest income
that was actually recorded during 2001, 2000 and 1999 with respect to such
non-accrual loans and leases amounted to approximately $429,000, $175,000 and
$426,000, respectively.
The $9.3 million of non-accrual loans and leases at December 31, 2001
consists of $556,000 of loans secured by first liens on single-family
residential property, $512,000 of loans secured by commercial property, $6.6
million of commercial business loans (of which $2.9 million were loans to
pre-profit companies), $421,000 of consumer loans and $1.1 million of lease
financing. The largest underperforming customer had an aggregate non-accrual
loan balance of $3.3 million that was participated to the Bank, secured by
accounts receivable and business assets. The customer has been current in its
payments to the Bank but has been identified by Shared National Institutional
Credit as a non-accrual credit at the lead bank. The second largest
underperforming customer had an aggregate non-accrual loan balance of $2.1
million, secured by accounts receivable and business assets. While both
customers continue to make payments, the ultimate collectibility of all
principal and interest is uncertain.
The accrual of interest on commercial loans, mortgage loans and leases
is generally discontinued when the loans and leases become 90 days past due and
when, in management's judgement, it is determined that a reasonable doubt exists
as to collectibility. The accrual of interest is also discontinued on
residential and consumer loans when such loans become 90 days past due, except
for those loans in the process of collection which are secured by cash
collateral or by real estate with a loan to value less than 75% for first
mortgage loans and less than 60% for second mortgage loans. When a loan is
placed on non-accrual status, interest accruals cease and uncollected accrued
interest is reversed and charged against current income. Additional interest
collected on such loans is recorded as a contra against the principal balance
and only recorded into interest income if the loan is returned to an accruing
status. A loan remains on non-accrual status until the factors which indicate
doubtful collectibility no longer exist, or the loan is liquidated, or when the
loan is determined to be uncollectible and is charged-off against the allowance
for loan losses.
All loans and leases are reviewed on a regular basis and are placed on
non-accrual status when, in the opinion of management, the collection of
additional interest is deemed insufficient to warrant further accrual. In
addition to the loans classified as underperforming at December 31, 2001, other
loans with a total principal balance of $7.1 million were identified by
management to be possible problem loans. While these borrowers are in compliance
with present repayment terms, their financial conditions have caused management
to believe that their loans may result in classification as past due or
non-accrual at some future time. These loans have been considered in the
recognition of impaired loans described below.
In 1995, the Company adopted the provisions of SFAS 114, "Accounting by
Creditors for Impairment of a Loan" as amended by SFAS 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures." Under
the Company's credit policy, all loans, except for leases, residential
mortgages, and consumer loans, are subject to impairment recognition on a
monthly basis. A loan is considered impaired when it is probable that all
principal and interest due under the contractual terms of a loan will not be
collected. The Company generally considers most loans 90 days or more past due
and all non-accrual loans to be impaired. Loan impairment is measured based on
the present value of expected future cash flows or the fair value of collateral
if the loan is collateral dependent. If the fair value of an impaired loan is
less than its recorded investment, a specific valuation allowance is allocated
to the loan. Interest income on impaired loans other than non-accrual loans, is
recorded on an accrual basis.
22
The following table sets forth the recorded investment in impaired
loans and the related valuation allowance for each loan category as of December
31, 2001 and 2000:
Amount in the Amount in the
Recorded Recorded
Investment in Investment in
Impaired Loans Impaired Loans Total
for Which There for Which There Recorded
is a Related is No Related Investment in Amount of
Allowance for Allowance for the Impaired Allowance for
Loan Losses Loan Losses Loans Loan Losses
- -----------------------------------------------------------------------------------------
At December 31, 2001
- -----------------------------------------------------------------------------------------
Commercial business $10,661 $-- $10,661 $2,039
Commercial real estate 4,513 -- 4,513 678
Construction -- -- -- --
- -----------------------------------------------------------------------------------------
Total $15,174 $-- $15,174 $2,717
- -----------------------------------------------------------------------------------------
At December 31, 2000
- -----------------------------------------------------------------------------------------
Commercial business $ 3,970 $-- $ 3,970 $ 512
Commercial real estate 2,414 -- 2,414 237
Construction -- -- -- --
- -----------------------------------------------------------------------------------------
Total $ 6,384 $-- $ 6,384 $ 749
- -----------------------------------------------------------------------------------------
Primarily all of the impaired loans were measured based on the fair
value of collateral. The average recorded investment in impaired loans for the
years ended December 31, 2001, 2000 and 1999 were $12.3 million, $3.8 million
and $1.8 million, respectively. Interest income recognized on impaired loans
totaled $538,000 for 2001, $176,000 for 2000 and $56,000 for 1999.
The amount of impaired loans is not directly comparable with the amount
of underperforming loans previously disclosed. The primary differences between
underperforming loans and impaired loans are: i) all loan categories are
considered in determining underperforming loans while impaired loan recognition
is limited to commercial business loans, commercial real estate loans and
construction loans; and ii) impaired loan recognition considers not only loans
90 days or more past due and non-accrual loans but also may include possible
problem loans other than delinquent loans. At December 31, 2001, the balance of
impaired loans included non-accrual loans of $7.1 million and loans 90 days or
more past due of $983,000. At December 31, 2000, the balance of impaired loans
included non-accrual loans of $1.5 million and loans 90 days or more past due of
$1.8 million.
The following table sets forth information concerning the principal
balances and percent of the total loan and lease portfolio represented by
delinquent loans and leases at the dates indicated:
- ----------------------------------------------------------------------------------------
At of December 31, 2001 2000 1999
- ----------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- --------
Delinquencies:
30 to 59 days $ 4,214 .80% $ 6,255 1.15% $ 7,488 1.49%
60 to 89 days 5,962 1.12 1,480 .27 1,288 .26
90 or more days 1,125 .21 4,502 .83 2,336 .46
- ----------------------------------------------------------------------------------------
Total $11,301 2.13% $12,237 2.25% $11,112 2.21%
========================================================================================
Concentrations of Credit Risk
The Company extends credit through loans and leases in the normal
course of business to its customers, a significant number of whom operate or
reside within southeastern Pennsylvania and surrounding business areas. The
ability of its customers to meet contractual obligations is, to some extent,
dependent upon the conditions of this regional economy.
In addition, certain groups of borrowers share characteristics which,
given current economic conditions may affect their ability to meet contractual
obligations. These customers and their credit extensions at December 31, 2001,
include: retail consumers that account for 14% of all credit extensions;
commercial mortgages and construction that account for 42%; residential
construction that account for 9%; and commercial business that accounts for 35%.
23
Summary of Loan and Lease Loss Experience
The following table details the allocation of the allowance for loan
and lease losses to the various categories at the dates indicated. The
allocation is not necessarily indicative of the categories in which future
losses will occur, and the entire allowance is available to absorb losses in any
category of loans or leases.
- ----------------------------------------------------------------------------------------------------------------------
At December 31, 2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
and and and and and
Leases Leases Leases Leases Leases
- ----------------------------------------------------------------------------------------------------------------------
Commercial business $5,062 24.47% $2,342 32.40% $1,256 23.79% $ 930 21.87% $749 20.14%
Commercial real estate 2,441 38.64 2,332 32.93 1,384 32.28 1,134 31.69 1,120 31.94
Construction 1,030 15.32 1,068 11.08 885 11.68 652 10.51 290 7.76
Single family
residential
mortgage 89 5.25 176 6.39 436 8.05 116 11.81 127 16.44
Consumer 229 8.88 15 6.86 39 6.93 39 6.78 131 7.43
Lease financing 1,066 7.44 1,474 10.34 1,927 17.27 1,619 17.34 1,446 16.29
- ----------------------------------------------------------------------------------------------------------------------
Total $9,917 100.00% $7,407 100.00% $5,927 100.00% $4,490 100.00% $3,863 100.00%
======================================================================================================================
The following table details the Company's allowance for loan and lease losses
for the periods indicated:
- ---------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Average loans and leases outstanding $553,705 $541,178 $454,479 $373,545 $306,052
- ---------------------------------------------------------------------------------------------------------------------
Balance beginning of period $ 7,407 5,927 $ 4,490 $ 3,863 $ 3,768
Charge-offs:
Commercial business 2,687 1,717 -- 2 291
Commercial real estate 42 -- -- -- 394
Single family residential mortgage 10 52 79 -- 3
Consumer 30 10 2 72 100
Lease financing 2,530 1,839 2,473 681 879
- ---------------------------------------------------------------------------------------------------------------------
Total charge-offs 5,299 3,618 2,554 755 1,667
- ---------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial business 447 121 18 128 20
Commercial real estate -- 7 -- 5 --
Construction -- -- -- 2 --
Single family residential mortgage 11 2 -- 1 --
Consumer 5 6 16 12 19
Lease financing 230 546 409 275 214
- ---------------------------------------------------------------------------------------------------------------------
Total recoveries 693 682 443 423 253
- ---------------------------------------------------------------------------------------------------------------------
Net charge-offs 4,606 2,936 2,111 332 1,414
Provision for loan and lease losses 7,116 4,416 3,548 959 1,509
- ---------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 9,917 $7,407 $ 5,927 $ 4,490 $ 3,863
=====================================================================================================================
Specific Valuation Allowance on Impaired Loans 354 -- 13 16 --
=====================================================================================================================
Ratio of net charge-offs during the period to average
loans and leases outstanding during the period .83% .54% .46% .09% .46%
=====================================================================================================================
Ratio of allowance for loan and lease losses to
non-performing loans and leases at end of period 106.28% 183.61% 103.96% 121.91% 177.28%
=====================================================================================================================
Ratio of allowance for loan and lease losses to under-
performing loans and leases at end of period(1) 94.85% 86.77% 73.75% 58.21% 78.84%
=====================================================================================================================
(1) Includes loans 90 or more days delinquent and still accruing.
An allowance for loan and lease losses is maintained at a level that
management considers adequate to provide for potential losses based upon an
evaluation of known and inherent risks in the portfolio. Management's periodic
evaluation of the adequacy of the allowance is based upon examination of the
portfolio, past loss experience, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
current economic conditions, the results of the most recent regulatory
examinations, and other relevant factors. While management uses the best
information available to make such evaluations, future adjustments to the
allowance may be necessary if economic conditions differ substantially from the
assumptions used in making such evaluations.
24
Deposits
Certificates of deposit in amounts of $100,000 or more were $124.6
million, $125.5 million and $116.9 million at December 31, 2001, 2000 and 1999,
including brokered certificates of deposits of $29.4 million, $30.0 million and
$20.5 million, respectively.
The following table presents the remaining maturity of certificates of
deposits of $100,000 or more at December 31,
2001:
----------------------------------------------------------------------------------------------------------------------
Remaining Maturity > 3 months > 6 months > 12 months
At December 31, 2001 3 months or less through 6 months through 12 months
----------------------------------------------------------------------------------------------------------------------
Certificates of Deposit $100,000 or more $60,743 $28,080 $26,056 $ 9,768
======================================================================================================================
Short-Term Borrowings
The following table presents certain information regarding short-term
securities sold under agreement to repurchase:
- ----------------------------------------------------------------------------------------------------
For the years ended December 31, 2001 2000 1999
- ----------------------------------------------------------------------------------------------------
Balance outstanding at end of period $ -- $53,700 $44,145
Weighted average interest rate at
end of period --% 6.34% 5.51%
Average balance outstanding $35,303 $66,259 $28,162
Weighted average interest rate during the
period 4.78% 6.06% 5.72%
Maximum amount outstanding at any month-end
during the period $67,499 $77,710 $47,145
Contractual Obligations and Commercial Commitments
The following table presents future payments under contractual cash
obligations as of December 31, 2001:
Payments Due by Period
----------------------------------------------------------------
Contractual Obligations Less than 1 Through 4 Through
1 Year 3 Years 5 Years After 5 Total
- --------------------------------------------------------------------------------------------------------
Long-term Debt $ -- $64,239 $36,278 $36,851 $137,368
Subordinated Debt -- 3,000 -- -- 3,000
Capital Securities(1) -- -- -- 21,000 21,000
Operating Leases 1,453 2,892 2,432 -- 6,777
---------------------------------------------------------------
Total Contractual Obligations $1,453 70,131 $38,710 $57,851 $168,145
===============================================================
(1) Gross of deferred costs of $740,000.
The following table presents possible future payments under outstanding
commitments as of December 31, 2001:
Amount of Commitment Expiration by Period
-----------------------------------------------------------------
Commercial Commitments Less than 1 Through 4 Through
1 Year 3 Years 5 Years After 5 Total
- ------------------------------------------------------------------------------------------------------
Unused Lines of Credit $118,590 $37,543 $ -- $ -- $156,133
Commitments to Extend Credit 23,269 -- -- -- 23,269
Letters of Credit 50 10,624 1,244 150 12,068
-----------------------------------------------------------------
Total Commercial Commitments $141,909 $48,167 $1,244 $150 $191,470
=================================================================
25
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Asset Liability Management
The major objectives of the Company's asset and liability management
are to manage exposure to changes in the interest rate environment, to ensure
adequate liquidity and funding, to preserve and build capital, and to maximize
net interest income opportunities. The Company manages these objectives through
its Asset Liability and Investment Committee. The Committee meets monthly to
develop strategies that affect the future level of net interest income,
liquidity and capital. The Committee utilizes cash flow forecasts, considers
current economic conditions and the direction of interest rates, and manages the
Bank's risk to such changes.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An institution is
considered to be liability sensitive, or as having a negative gap, when the
amount of its interest-bearing liabilities maturing or repricing within a given
time period exceeds the amount of its interest-earning assets also maturing or
repricing within that time period. Conversely, an institution is considered to
be asset sensitive, or as having a positive gap, when the amount of its
interest-bearing liabilities maturing or repricing is less than the amount of
its interest-earning assets also maturing or repricing during the same period.
Generally, in a falling interest rate environment, a negative gap should result
in an increase in net interest income, and in a rising interest rate
environment, a negative gap should adversely affect net interest income. The
converse would be true for a positive gap.
However, shortcomings are inherent in a simplified gap analysis that
may result in an institution with a nominally negative gap having interest rate
behavior associated with an asset sensitive balance sheet. For example, although
certain assets and liabilities may have a similar maturity or periods of
repricing, they may react in different degrees to changes in market interest
rates. Furthermore, repricing characteristics of certain assets and liabilities
may vary substantially within a given time period. In the event of a change in
interest rates, prepayment and early withdrawal levels could also deviate
significantly from those assumed in calculating gap.
Management believes that the simulation of net interest income in
different interest rate environments provides a more meaningful measure of
interest rate risk. Simulation analysis incorporates the potential of all assets
and liabilities to mature or reprice as well as the probability that they will
do so. Simulation in net interest income over a two-year period also
incorporates the relative interest rate sensitivities of these items, and
projects their behavior over an extended period of time. Finally, simulation
analysis permits management to assess the probable effects on the balance sheet
not only of changes in interest rates, but also of proposed strategies for
responding to them.
The Company's simulation model analyzes interest rate sensitivity by
projecting net interest income over the next 24 months in a flat rate scenario.
The flat rate model projects growth in the loan portfolio and projects the mix
of accounts within the loan portfolio. In addition, the Company must also make
certain assumptions regarding the movement of the rates on its assets and
liabilities, especially its deposit rates.
The Company projects net interest income in a rising rate scenario of
200 basis points over a 24-month period as well as a 200 basis point decrease in
a declining rate scenario during this same period. The Company then determines
its interest rate sensitivity by calculating the difference in net interest
income in the rising and declining rate scenarios versus the flat rate scenario.
Based on this analysis at December 31, 2001 the Company would experience an
approximate 5.4% increase in net interest income over a one year period if rates
rise 200 basis points in comparison to a flat rate scenario and an approximate
5.9% decrease in net interest income if rates decline 200 basis points.
26
The following table presents the anticipated maturities or repricing of
the Company's interest-earning assets and interest-bearing liabilities for
various time periods based on the information and the assumptions set forth in
the notes below.
Less than Three months One to five Five to ten Over ten
three months to one year years years years
At December 31, 2001 Amount Yield/Rate Amount Yield/Rate Amount Yield/Rate Amount Yield/Rate Amount Yield/Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-earnings assets(1)
Interest-earning deposits $ 11,277 1.65% $ -- --% $ -- --% $ -- --% $ -- --%
Investment securities 13,119 4.01 17,238 7.07 4,016 7.26 10,853 7.94 -- --
Mortgage-backed securities 8,479 5.88 25,157 5.90 71,572 5.89 52,323 5.89 48,206 5.92
Commercial business(2) 111,363 6.48 5,656 8.30 21,886 8.55 1,948 8.42 47 7.25
Commercial real estate
loans(2) 28,548 7.09 37,535 8.37 123,844 8.21 7,697 8.15 -- --
Construction loans 75,027 6.69 2,860 7.48 -- -- -- -- -- --
Single family residential 3,087 7.98 13,030 7.48 8,097 7.69 1,594 7.73 212 7.77
Consumer loans 16,943 5.24 3,391 7.90 14,498 7.75 6,956 7.83 2,407 8.09
Lease financing 2,500 11.50 12,500 11.50 19,535 10.53 -- -- -- --
-------------------------------------------------------------------------------------------------------
Total interest-earning
assets $270,343 6.25% 117,367 7.85% $263,448 7.73% 81,371 6.64% 50,872 6.03%
=======================================================================================================
Interest-bearing
liabilities:(3) (4)
Money market deposits $ 6,362 1.75% $6,794 1.75% $20,390 1.75% $ 8,155 1.75% 4,078 1.7%
NOW and Super NOW 6,074 1.57 21,330 1.52 63,544 1.52 25,606 1.52 4,111 1.52
Passbook and statement
savings 503 1.05 2,517 1.05 16,605 1.05 7,548 1.05 3,018 1.05
Time deposits 89,148 3.32 191,749 4.15 67,101 4.61 107 5.40 -- --
Short-term borrowings 119 2.81 81 7.50 -- -- -- -- -- --
Long-term debt -- -- -- -- 126,868 5.47 10,500 6.20 -- --
Subordinate debt -- -- -- -- 3,000 8.25 -- -- -- --
-------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $102,206 3.10% 222,471 3.79% $297,508 3.96% $51,916 2.44% $11,207 1.4%
=======================================================================================================
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $168,137 $(105,104) $(34,060) $29,455 $39,665
=======================================================================================================
Cumulative excess of
interest-earning assets over
interest-bearing liabilities $168,137 $ 63,033 $ 28,973 $58,428 98,093
=======================================================================================================
Cumulative excess of
interest-earning assets over
interest-bearing liabilities
as a percent of total assets 19.75% 7.40% 3.40% 6.86% 11.52%
=======================================================================================================
(1) Adjustable and floating-rate items are included in the period in which
interest rates are next scheduled to reprice rather than in the period in
which they are due, and fixed rate loans are included in period in which
they are scheduled to be repaid or are estimated to prepay. Loan balances
have been reduced for non-accrual loans, which amounted to $9.3 million at
December 31, 2001. Interest earning assets do not include loan loss
reserves, deferred loan fees, and mark-to market adjustment on available
for sale securities.
(2) Loans held for sale are included in the three month time period: commercial
business of $23.3 million and commercial real estate of $2.3 million.
(3) Money market deposits, savings accounts, and NOW accounts are estimated in
terms of repricing and balance sensitivity; the estimates are necessarily
subjective due to the indeterminate maturity of the accounts.
(4) Deposits that are part of the loan sale are included in the three month
time period.
27
Item 8. Financial Statements and Supplementary Data
Consolidated Statements of Financial Condition
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------
At December 31, 2001 2000
- ------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from other financial institutions:
Non-interest earning $21,250 $25,360
Interest earning 11,276 59,637
Investments and mortgage-backed securities:
Available for sale at fair value $212,793 in 2001 and $207,795 in
(amortized cost: 2000) 211,828 205,166
Held to maturity at amortized cost (fair value: $38,020 in 2001 and $40,225 in 2000) 38,173 41,940
Loans and leases, net (net of reserves: $9,917 in 2001 and $7,407 in 2000) 495,025 535,712
Loans held for sale 25,587 --
Investments in unconsolidated entities 1,985 9,266
Premises and equipment, net 26,038 18,343
Accrued interest receivable 4,551 5,625
Net deferred income tax assets 4,839 4,446
Other assets 10,828 8,754
-------- --------
Total assets $851,380 $914,249
======== ========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest-bearing 544,740 529,187
Interest-bearing
Short-term borrowings:
Securities sold under agreement to repurchase -- 53,700
Other short-term borrowings 200 25,660
Long-term debt 137,368 112,000
Subordinated debt 3,000 3,000
Payable for securities purchased -- 10,075
Accrued interest 3,526 5,819
payable
Deferred tax 1,609 2,229
liabilities
Other liabilities 5,295 13,831
-------- --------
Total liabilities 780,521 843,857
-------- --------
Corporation-obligated mandatorily redeemable capital securities of subsidiary trust
holding solely junior subordinated debentures of the Corporation 20,260 20,232
Commitments and contingencies (Note 16)
Shareholders' equity:
Serial preferred stock--$.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; and 5,818,000 and 5,814,000 shares 12,000,000 shares
authorized; issued and outstanding at December 31, 2001 and December 31, 2000,
respectively 5,818 5,814
Treasury stock (84,000 and 125,000 shares at December 31, 2001 and December 31,
2000, respectively) (628) (1,245)
Unearned Employee Stock Ownership Plan shares (182,000 and 0 shares at December
31, 2001 and December 31, 2000, respectively) (1,448) --
Unearned compensation - restricted stock awards (107) (858)
Capital surplus 44,029 44,400
Retained earnings 3,620 3,848
Net accumulated other comprehensive loss (685) (1,799)
-------- --------
Total shareholders' equity 50,599 50,160
-------- --------
Total liabilities, Corporation-obligated mandatorily redeemable capital
securities and shareholders' equity $851,380 $914,249
======== ========
See Notes to Consolidated Financial Statements.
28
Consolidated Statements of Income
(Dollars in thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans and leases $47,215 $51,132 $40,952
Mortgage-backed securities 13,935 10,461 8,008
Investment securities 2,890 4,115 2,346
Other 945 1,320 868
------- ------- -------
Total interest income 64,985 67,028 52,174
------- ------- -------
Interest expense:
Deposits 23,397 24,162 16,759
Short-term borrowings 1,759 4,707 2,199
Long-term debt 8,216 6,306 6,474
------- ------- -------
Total interest expense 33,372 35,175 25,432
------- ------- -------
Net interest income 31,613 31,853 26,742
Provision for loan and lease losses 7,116 4,416 3,548
------- ------- -------
Net interest income after provision for loan and lease losses 24,497 27,437 23,194
------- ------- -------
Non-interest income:
Service charges on deposits 2,616 2,236 2,097
Lease financing fees 751 1,433 1,223
Mutual fund, annuity and insurance commissions 3,094 4,605 2,669
Loan brokerage and advisory fees 1,319 2,193 2,385
Private equity fund management fees 2,457 2,235 702
Gain (loss) on sale of securities 2,819 533 (347)
Gain (loss) on sale of loan and lease receivables 975 667 (20)
Gain on sale of investments in unconsolidated entities 802 -- --
Gain on sale of leasing division -- 1,686 --
Client warrant income (loss) (1,948) 3,523 4,188
Equity (loss) in unconsolidated entities (634) (2,791) 2,524
Other 3,860 3,222 2,166
------- ------- -------
Total non-interest income 16,111 19,542 17,587
------- ------- -------
Non-interest expense:
Salaries and employee benefits 19,159 20,180 15,850
Occupancy 2,541 2,302 1,495
Data processing 1,001 1,098 1,171
Professional services 3,662 2,466 1,943
Furniture, fixtures and equipment 2,234 2,147 1,477
Loan and real estate owned expenses, net 1,394 1,228 720
Capital securities expense 2,278 1,907 1,595
Other 7,294 6,978 7,397
------- ------- -------
Total non-interest expense 39,563 38,306 31,648
------- ------- -------
Income from continuing operations before income taxes and extraordinary loss 1,045 8,673 9,133
Income tax expense 302 3,016 3,101
------- ------- -------
Income from continuing operations before extraordinary loss 743 5,657 6,032
Gain on sale of discontinued operations (net of tax expense of $1,035) -- 1,519 --
Income from discontinued operations (net of tax expense of $30 and $442) -- 123 639
------- ------- -------
Income before extraordinary loss 743 7,299 6,671
Extraordinary loss on early extinguishment of debt (net of tax benefit of $102) (199) -- --
------- ------- -------
Net income $ 544 $ 7,299 $ 6,671
======= ======= =======
Basic income, per common share, from continuing operations before extraordinary loss $ .13 $ .98 $ 1.04
Diluted income, per common share, from continuing operations before extraordinary loss .13 .95 .99
Basic earnings per common share, before extraordinary loss .13 1.26 1.15
Diluted earnings per common share, before extraordinary loss .13 1.22 1.10
Basic earnings per common share .10 1.26 1.15
Diluted earnings per common share .10 1.22 1.10
Dividends per common share .12 .21 .17
Average common shares outstanding 5,599,358 5,793,607 5,778,014
Diluted average common shares outstanding 5,717,568 5,984,594 6,085,859
See Notes to Consolidated Financial Statements.
29
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive
Income
(Dollars in thousands)
For the years ended December 31, 2001, 2000 and 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Unearned Net
Compensation Accumulated
Unearned Restricted Other
Common Treasury ESOP Stock Capital Retain Comprehensive
Stock Stock Shares Awards Surplus Earnings Income (Loss)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1999 $ 5,263 $(2,287) $ (114) $ -- $39,586 $ (399) $ (495)
Issuance of stock under
employee benefit plans
(21,772 common shares; 107,709
treasury shares; 10,799
ESOP shares) 22 1,319 50 (1,066) 134 -- --
Retirement of restricted stock
awards (1,300 common shares) (1) -- -- 15 (14) -- --
Exercise of stock warrants
(125,971 common shares; 122,088 126 1,666 -- -- (442) -- --
treasury shares)
Early retirement of warrants -- -- -- -- (331) -- --
Net income -- -- -- -- -- 6,671 --
Other comprehensive income, net
of tax (a) -- -- -- -- -- -- 1,729
Net comprehensive income
Purchase of treasury stock
(202,500 treasury shares) -- (2,661) -- -- -- -- --
Cash dividend declared -- -- -- -- -- (962) --
Distribution of stock dividend
(269,997 common shares; 2,250
treasury shares; 799 ESOP
shares) 270 -- -- -- 3,679 (3,949) --
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 5,680 (1,963) (64) (1,051) 42,612 1,361 1,234
Issuance of stock under
employee benefit plans
(24,239 common shares; 6,154
treasury shares; 14,011
ESOP shares) 24 80 64 192 325 -- --
Retirement of restricted stock
awards (84 common shares) -- -- -- 1 (1) -- --
Net income -- -- -- -- -- 7,299 --
Other comprehensive loss, net
of tax (a) -- -- -- -- -- -- (3,033)
Net comprehensive income
Purchase of treasury stock
(205,500 treasury shares) -- (2,165) -- -- -- -- --
Acquisition of subsidiary
(60,000 treasury shares) -- 800 -- -- -- -- --
Cash dividend declared -- -- -- -- -- (1,235) --
Distribution of stock dividend
(109,833 common shares; 166,596
treasury shares) 110 2,003 -- -- 1,464 (3,577) --
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 5,814 (1,245) -- (858) 44,400 3,848 (1,799)
Issuance of stock under
employee benefit plans
(44,309 common shares; 6,484
ESOP shares) 44 -- 52 223 244 -- --
Retirement of restricted stock
awards (40,352 common shares) (40) -- -- 528 (488) -- --
Net income -- -- -- -- -- 544 --
Other comprehensive income, net
of tax (a) -- -- -- -- -- -- 1,114
Net comprehensive income
Purchase of treasury stock
(147,500 treasury shares) -- (1,105) -- -- -- -- --
Shares acquired for ESOP
(188,700 ESOP shares) -- 1,722 (1,500) -- (127) (95) --
Cash dividend declared -- -- -- -- -- (677) --
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 5,818 $(628) $(1,448) $ (107) $44,029 $ 3,620 $ (685)
==================================================================================================================================
(a)Calculation of other comprehensive income (loss) net of tax: 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Unrealized holding gains (losses) arising during the period, net of tax $3,172 $(2,681) $1,500
Less: Reclassification adjustment for gains (losses) included in net income, net of tax 2,058 352 (229)
------ ------- ------
Other comprehensive income (loss), net of tax $1,114 $(3,033) $1,729
====== ======= ======
Total
Comprehensive Shareholders'
Income Equity
- ----------------------------------------------------------------------------
Balance at January 1, 1999 $41,554
Issuance of stock under
employee benefit plans
(21,772 common shares; 107,709
treasury shares; 10,799
ESOP shares) 459
Retirement of restricted stock
awards (1,300 common shares) --
Exercise of stock warrants
(125,971 common shares; 122,088 1,350
treasury shares)
Early retirement of warrants (331)
Net income $6,671 6,671
Other comprehensive income, net
of tax (a) 1,729 1,729
------
Net comprehensive income $8,400
======
Purchase of treasury stock
(202,500 treasury shares) (2,661)
Cash dividend declared (962)
Distribution of stock dividend
(269,997 common shares; 2,250
treasury shares; 799 ESOP
shares) --
- ----------------------------------- -------
Balance at December 31, 1999 47,809
Issuance of stock under
employee benefit plans
(24,239 common shares; 6,154
treasury shares; 14,011
ESOP shares) 685
Retirement of restricted stock
awards (84 common shares) --
Net income $7,299 7,299
Other comprehensive loss, net
of tax (a) (3,033) (3,033)
------
Net comprehensive income $4,266
======
Purchase of treasury stock
(205,500 treasury shares) (2,165)
Acquisition of subsidiary
(60,000 treasury shares) 800
Cash dividend declared (1,235)
Distribution of stock dividend
(109,833 common shares; 166,596
treasury shares) --
- ----------------------------------- -------
Balance at December 31, 2000 50,160
Issuance of stock under
employee benefit plans
(44,309 common shares; 6,484
ESOP shares) 563
Retirement of restricted stock
awards (40,352 common shares) --
Net income $ 544 544
Other comprehensive income, net
of tax (a) 1,114 1,114
------
Net comprehensive income $1,658
======
Purchase of treasury stock
(147,500 treasury shares) (1,105)
Shares acquired for ESOP
(188,700 ESOP shares) --
Cash dividend declared (677)
- ----------------------------------- -------
Balance at December 31, 2001 $50,599
=================================== =======
See Notes to Consolidated Financial Statements.
30
Consolidated Statements of Cash Flows
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Income from continuing operations $ 544 $ 5,657 $ 6,032
Add (deduct) items not affecting cash flows from continuing operations:
Depreciation and amortization 3,100 3,159 1,393
Provision for loan and lease losses 7,116 4,416 3,548
Deferred income tax expense (benefit) (1,587) (2,160) 893
Gain on sale of leasing division -- (1,686) --
Gain from sale of loans held for sale -- -- (14)
(Gain) loss from sales of loans and leases (975) (667) 34
(Gain) loss from sales of securities available for sale (2,819) (533) 347
Gain on sale of investments in unconsolidated entities (802) -- --
Amortization of deferred loan fees (2,138) (2,572) (2,747)
Amortization of premiums/accretion of discounts on securities 1,287 216 903
Client warrant (income) loss 1,948 (3,523) (4,188)
(Equity) loss in unconsolidated entities 634 2,791 (2,524)
Other, net 57 297 351
Originations and purchases of loans held for sale -- -- (11,365)
Proceeds from sales of loans held for sale -- -- 9,476
Repayments on loans held for sale -- -- 4,766
Net proceeds from sales of trading securities -- 996 --
(Increase) decrease in accrued interest receivable 1,074 (1,463) (917)
(Increase) decrease in other assets (3,191) 1,351 357
Increase (decrease) in other liabilities (18,801) 11,820 756
Increase (decrease) in accrued interest payable (2,324) 2,883 676
-------- -------- --------
Net cash flows provided by (used in) continuing operations (16,877) 20,982 7,777
Net cash flows provided by (used in) discontinued operations -- (1,917) 6
-------- -------- --------
Net cash flows provided by (used in) operating activities (16,877) 19,065 7,783
Cash flows from investing activities:
Capital expenditures (8,530) (5,012) (6,187)
Purchases of investments and mortgage-backed securities available for sale (227,407) (84,200) (40,273)
Purchases of investment and mortgage-backed securities held to maturity (1,301) (7,599) (12,428)
Repayments on investment and mortgage-backed securities available for sale 92,750 17,127 32,902
Proceeds from sales, maturity and calls of investment and mortgage-backed
securities available for sale 128,528 10,323 17,132
Proceeds from call of investment security held to maturity 5,099 -- --
Proceeds from sale of investment in NewSeasons Assisted Living Communities
Series B and C preferred stock 1,792 -- --
Proceeds from sale of investments in unconsolidated entities 2,533 -- --
Net cash received in acquisition of banking offices 19,328 -- --
Proceeds from sale of leasing division -- 32,460 --
Investment in real estate owned (1,188) (4,314) --
Proceeds from sales of real estate owned 3,798 8,226 --
Proceeds from sales of loan and lease receivables 24,430 23,419 875
Proceeds from sale of AMIC division of Progress Realty Services, Inc. 500 -- --
Proceeds from sale of discontinued teleservices operations -- 4,944 --
Purchases of loans and lease receivables -- -- (4,180)
Net increase in total loans and leases (5,712) (99,318) (78,701)
Net investments in unconsolidated entities (313) (268) (3,365)
Other, net (125) (375) (625)
-------- -------- --------
Net cash flows provided by (used in) investing activities 34,182 (104,587) (94,850)
-------- -------- --------
Cash flows from financing activities:
Net increase in demand, NOW and savings deposits 11,187 44,974 11,038
Net increase (decrease) in time deposits (25,668) 51,130 102,795
Decrease in short-term borrowings (79,292) (407) (14,205)
Proceeds from issuance of long-term debt 45,500 47,000 9,000
Repayment of long-term debt (10,000) -- --
Early extinguishment of long-term debt (10,000) -- --
Repayment on calls of long-term debt -- (15,000) --
Dividends paid (677) (1,235) (962)
Proceeds from stock offerings and exercise of warrants -- -- 1,350
Retirement of warrants -- -- (331)
Proceeds from issuance of stock under employee benefit plans 279 296 282
Purchase of treasury stock (1,105) (2,165) (2,661)
Proceeds from issuance of capital securities -- 6,000 --
-------- -------- --------
Net cash flows provided by (used in) financing activities (69,776) 130,593 106,306
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (52,471) 45,071 19,239
Cash and cash equivalents:
Beginning of year 84,997 39,926 20,687
-------- -------- --------
End of year $ 32,526 $ 84,997 $ 39,926
======== ======== ========
31
Consolidated Statements of Cash Flows - continued
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures:
Net conversion of loans receivable to real estate owned $ 1,987 $ 5,696 $ 66
Transfer of loans from portfolio to held for sale 25,587 -- --
Transfer of loans held for sale to portfolio -- -- 22,305
Transfer of investment securities available for sale to held to maturity -- -- 9,464
Notes received in sale of investment in NewSeasons Assisted Living Communities Series B
and C preferred stock 4,180 -- --
Exercise of client warrants -- 1,986 3,256
Treasury shares issued in purchase of subsidiary -- 800 --
Cash payments for:
Income taxes for continuing operations $ 4,776 $ 1,998 $ 3,257
Income taxes for discontinued operations -- 759 466
Interest 35,665 32,292 24,756
See Notes to Consolidated Financial Statements.
(1) Summary of Significant Accounting Policies
Progress Financial Corporation and its subsidiaries (the "Company")
follow accounting principles and reporting practices that are in accordance with
generally accepted accounting principles in the United States of America. In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the financial
statements, and the reported amounts of revenues and expenses for the period.
Actual results could differ from such estimates.
The material estimates relate to the determination of the allowance for
loan and lease losses, the deferred tax asset valuation allowance, and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
loan and lease losses and real estate owned, management obtains independent
appraisals for collateral dependent loans and significant properties.
The more significant accounting policies are summarized below. Certain
prior period amounts have been reclassified when necessary to conform to current
year classifications. Tabular information is presented in thousands of dollars.
Basis of Presentation
The consolidated financial statements include the accounts of Progress
Financial Corporation and its subsidiaries; Progress Bank (the "Bank"), Progress
Capital Inc. ("PCI"), Progress Development Corp. ("PDC"), Progress Financial
Resources, Inc. ("PFR"), Progress Capital Management, Inc. ("PCM") and KMR
Management, Inc. ("KMR"). The Bank's primary operating subsidiaries are Progress
Leasing Company ("PLC") and Progress Realty Advisors, Inc. ("PRA"). All
significant intercompany transactions and balances have been eliminated.
Significant estimates are made by management in determining the
allowance for loan and lease losses and carrying values of real estate owned.
Consideration is given to a variety of factors in establishing these estimates
including current economic conditions, diversification of the loan portfolio,
delinquency statistics, results of internal loan reviews, borrowers' perceived
financial and managerial strengths, the adequacy of underlying collateral, the
dependence on collateral, or the strength of the present value of future cash
flows and other relevant factors. Since the allowance for loan and lease losses
and carrying value of real estate assets is dependent, to a great extent, on
general and other conditions that may be beyond the Company's control, it is at
least reasonably possible that the Company's estimates of the allowance for loan
and lease losses and the carrying values of the real estate assets could differ
materially in the near term.
The earnings of the Company depend primarily upon the level of net
interest income, which is the difference between interest earned on its
interest-earning assets, such as loans and leases and investments, and the
interest paid on its interest-bearing liabilities; such as deposits and
borrowings. Accordingly, the operations of the Company are subject to broad
risks and uncertainties surrounding its exposure to changes in the interest rate
environment.
32
Cash and Cash Equivalents
The Company's cash and due from other financial institutions are
classified as cash and cash equivalents, which have an original maturity of
three months or less.
Trading, Investment and Mortgage-Backed Securities
The Company accounts for its investments in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires debt
and equity securities to be classified and accounted for as follows: debt
securities which the Company has the positive intent and ability to hold to
maturity are classified as "securities held to maturity" and are reported at
amortized cost adjusted for amortization of premiums and accretion of discounts,
both computed on the interest method; debt and equity securities that are bought
and held principally for the purpose of selling in the near term are classified
as "trading securities" and are reported at fair value with unrealized gains and
losses included in earnings; and debt and equity securities not classified as
either held to maturity or trading securities are classified as "securities
available for sale" and are reported at fair value with unrealized gains and
losses excluded from earnings, but reported as a separate component of
shareholders' equity, net of deferred income taxes.
Investment and mortgage-backed securities classified as available for
sale include such items that management intends to use as part of its
asset-liability strategy or that may be sold in response to changes in interest
rates, changes in prepayment risks, the need to increase regulatory capital or
other strategic factors. When an investment or mortgage-backed security is sold,
any gain or loss is recognized utilizing the specific identification method.
Real Estate Owned
Real estate acquired in partial or full satisfaction of loans is
classified as real estate owned ("REO"). Prior to transferring a real estate
loan to REO, it is written down to the lower of cost or estimated fair value
less estimated selling costs (net realizable value) through a charge to the
allowance for loan and lease losses. Subsequently, valuations are periodically
performed by management, and any decline in net realizable value is charged to
operations. Costs relating to the development and improvement of property are
capitalized, whereas costs relating to the holding of property are only
capitalized when carrying value does not exceed net realizable value. If a sale
of real estate owned results in a gain or loss, the gain or loss is charged to
operations as incurred.
Investments in Unconsolidated Entities
Investments in unconsolidated entities consist of partnerships,
corporate joint ventures and other investments in which the Company owns 50% or
less of the common stock. Investments in unconsolidated entities that the
Company has the ability to exercise significant influence over operating and
financial policies are accounted for under the equity method. All others are
accounted for under the cost method.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed based on the estimated useful lives of
the assets using the straight-line method. Gains and losses are recognized upon
disposal of the assets. Maintenance and repairs are recorded as expenses.
Federal Income Taxes
The Company and its subsidiaries file a consolidated Federal income tax
return. Certain items of income and expense (primarily net operating losses,
depreciation, provision for loan and lease losses, and real estate owned losses)
are reported in different periods for tax purposes. Deferred taxes are provided
on such temporary differences existing between financial and income tax
reporting subject to the deferred tax asset realization criteria required under
SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109".)
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of aggregate cost or market value. Net unrealized
losses are charged to income in the period in which they arise.
33
Loans and Leases
Loans and leases are stated at the principal amount outstanding,
excluding unearned interest and allowance for loan and lease losses and
including unamortized initial direct costs.
The company originates direct finance leases accounted for in
accordance with SFAS No. 13 "Accounting for Leases." Under this method, the
excess of minimum rentals plus estimated residual value over the cost of
equipment is recorded as unearned income and amortized over the lease term so as
to produce a constant periodic rate of return on the net investment in the
lease.
The accrual of interest on commercial loans and leases is discontinued
when they become 90 days past due and when, in management's judgment, it is
determined that a reasonable doubt exists as to their collectibility. The
accrual of interest is also discontinued on residential mortgage and consumer
loans when such loans become 90 days past due, except for those loans in the
process of collection which are secured by real estate and have a loan to value
ratio less than 75% for first mortgage loans and 60% for second mortgage loans.
When a loan is placed on non-accrual status, interest accruals cease and
uncollected accrued interest is reversed and charged against current income.
Additional interest collected on such loans is recorded as a contra against the
principal balance and only recorded into interest income if the loan is returned
to an accruing status.
Loan origination fees and related direct loan origination costs are
deferred and recognized over the life of the loan as an adjustment to yield. The
unamortized balance of such net loan origination fees is reported on the
Company's consolidated statements of financial condition as part of loans. Lease
origination and commitment fees and related costs are deferred and the amount is
amortized as an adjustment to the related asset's yield.
Allowance for Loan and Lease Losses
An allowance for loan and lease losses is maintained at a level that
management considers adequate to provide for potential losses in the loan and
lease portfolio. Management's periodic evaluation of the adequacy of the
allowance is based upon examination of the portfolio, past loss experience,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, current economic conditions and
other relevant factors. While management uses the best information available to
make such evaluations, future adjustments to the allowance may be necessary if
economic conditions differ substantially from the assumptions used in making the
evaluations. The allowance for loan losses includes reserves for impaired loans.
All non-accrual commercial business, commercial mortgage and construction loans
are considered impaired loans. The measurement of impaired loans may be based on
the present value of expected future cash flows discounted at the historical
effective rate or based on the fair value of the underlying collateral.
Impairment criteria are applied to the loan portfolio exclusive of smaller
balance homogeneous loans such as residential mortgages and consumer loans,
which are evaluated collectively for impairment.
Goodwill
Goodwill is the excess of the purchase price over the fair value of net
tangible and identifiable intangible assets of companies acquired through
business combinations accounted for as purchases. In finalizing a purchase
allocation, the Company considers all the facts that come to its attention
during the allocation period, not to exceed 12 months, and, if necessary, will
adjust the purchase price allocation accordingly based on such facts. Goodwill
is amortized using the straight line method over various periods not exceeding
25 years. The carrying amount of the goodwill is reviewed if facts and
circumstances suggest that it may be impaired. If this review indicates that
goodwill will not be recoverable, as determined based on the loss of economic
value, the carrying amount of the goodwill is reduced by the estimated loss of
value. In addition, the Company evaluates the impairment of goodwill associated
with impaired long-lived assets under the rules of SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Future amortization and impairment of the Company's goodwill will be
affected by SFAS No. 142 as discussed in Footnote 2, "Recent Accounting
Pronouncements."
Treasury Stock
The Company accounts for treasury stock purchases at cost. Shares are
reissued on a FIFO (first-in-first-out) basis.
34
Earnings Per Share
The Company presents "Earnings Per Share" on a basic per-share amount
for income from continuing operations and on a diluted basis. The per share
results of operations were computed by dividing net income by the weighted
average number of shares outstanding during the period. Shares outstanding do
not include treasury shares and Employee Stock Ownership Plan ("ESOP") shares
that were purchased and unallocated in accordance with Statement of Position
("SOP") 93-6, "Employers Accounting for Employees Stock Ownership Plans." Prior
period amounts have been restated to reflect stock dividends distributed during
2000.
Accounting for Derivative Instruments
Under the Financial Accounting Standards Board ("FASB") SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133"),
client warrants are considered derivatives and should be marked to market
through earnings if readily convertible to cash. At December 31, 2001, the
Company owned warrants on common stock in approximately 47 companies which were
not readily convertible to cash as they contained certain conditions which
precluded their convertibility; and hence, have not been included in assets. If,
in the future, those conditions were to be satisfied and the underlying common
stock were to become marketable, the warrants would be recorded at fair value as
an adjustment to current earnings.
(2) Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combination,"
("FAS 141") and No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS
141 is effective for all business combinations initiated after June 30, 2001,
requires the purchase method for those business combinations, and prohibits the
pooling-of-interests method. The provisions of FAS 141, which address the
financial accounting and reporting for goodwill and other intangibles created,
and for other intangibles acquired, in a business combination, apply to all
business combinations accounted for by the purchase method for which the date of
acquisition is July 1, 2001, or later. FAS 141 does not affect the Company's
results of operations. FAS 142 addresses the financial accounting and requires
new reporting disclosures for acquired goodwill and other intangible assets, but
not those acquired in a business combination, and for goodwill and other
intangible assets after they have been initially recognized in the financial
statements. Goodwill will not be amortized; it will be annually tested for
impairment using specific guidance under FAS 142. Other intangible assets that
have indefinite useful lives will not be amortized; they will also be annually
tested for impairment using specific guidance under FAS 142. Intangible assets
that have finite useful lives will continue to be amortized over their useful
lives, or the best estimate of their useful lives. FAS 142 is required to be
applied starting with fiscal years beginning after December 15, 2001; however,
goodwill and other intangible assets acquired after June 30, 2001 will be
subject immediately to the nonamortization and amortization provisions. The
Company does not anticipate a material change to its results of operations as a
result of adopting FAS 142.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," ("FAS 143"). FAS 143 addresses the financial accounting
and reporting for legal obligations associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development
and/or normal operation of a long-lived asset, except for certain obligations of
lessees, and the associated retirement costs. FAS 143 requires the fair value of
a liability for an asset retirement obligation be recognized in the period
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. FAS 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company does not anticipate a
material change to its financial representation as a result of adopting FAS 143.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," ("FAS 144"). FAS 144 addresses the
financial accounting and reporting for the impairment or disposal of long-lived
assets. FAS 144 supersedes FASB SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business (as
previously defined in that Opinion). This Statement also amends Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. The provisions of FAS 144 are effective for financial statements
issued for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years, with early application encouraged. The provisions of
this Statement generally are to be applied prospectively.
35
(3) Acquisitions
On January 3, 2000, the Company acquired KMR Management, Inc. ("KMR"),
a Pennsylvania based corporation. The acquisition was accounted for under the
purchase method of accounting. The purchase price was $1.1 million, which
included the issuance of 60,000 treasury shares. Goodwill of $1.1 million was
generated which has been recorded in other assets and was amortized through the
end of 2001 on a straight-line basis over 10 years. In accordance with FAS 142,
amortization has been discontinued starting with 2002 and will be tested
annually for impairment.
On October 8, 2001, the Bank completed the acquisition of two banking
offices with deposits of $26.4 million from Main Street Bank, a Reading,
Pa.-based bank subsidiary of Main Street Bancorp, Inc. The banking offices are
located in Doylestown, Pa. in Bucks County and Lambertville, N.J. in Hunterdon
County. This will bring the total number of Progress banking offices to 20, and
will expand the bank into the state of New Jersey. The transaction was accounted
for under the purchase method of accounting and generated no goodwill. In
connection with the acquisition, the Bank acquired assets with an aggregate fair
value of $7.1 million and assumed deposits of $26.4 million with net cash
received of $19.3 million.
(4) Discontinued Operations
During the second quarter of 2000, the Company decided to sell its
teleservicing assets to move toward focusing on its core financial services
competencies. Prior period presentation has been restated to reflect the
requirement of Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations," so that discontinued operations of Procall Teleservices,
Inc. are separated from the continued operations of the Company as a whole.
On May 19, 2000, the Company sold the assets of Procall Teleservices,
Inc., its business-to-business teleservices subsidiary. The Company recognized a
gain on this sale of $2.5 million pretax ($1.5 million net of tax of $1.0
million) or diluted earnings per share of $.25.
Net assets of discontinued operations at December 31, 1999 were as
follows:
Premises and equipment, net $ 843
Accounts receivable 345
------
Net assets of discontinued operations $1,188
======
Condensed results of discontinued operations for the twelve months
ended 2000 and 1999 are as follows:
For the years ended December 31, 2000 1999
----------------------------------------------------------------
Non-interest income $1,558 $3,406
Non-interest expense 1,405 2,325
------ ------
Income (loss) before income tax 153 1,081
Income tax expense (benefit) 30 442
------ ------
Net income (loss) $ 123 $ 639
====== ======
(5) Cash and Due from Other Financial Institutions
Progress Bank is required by the Federal Reserve Board to maintain
reserves based principally on deposits outstanding and are included in cash and
due from other financial institutions. At December 31, 2001 and 2000, required
reserves were $495,000 and $230,000, respectively.
(6) Investment and Mortgage-Backed Securities
The Bank is required under current Office of Thrift Supervision ("OTS")
regulations to maintain defined levels of liquidity and utilizes certain
investments that qualify as liquid assets. To meet these requirements, the Bank
utilizes deposits with the Federal Home Loan Bank of Pittsburgh ("FHLB") and
United States government and agency obligations.
36
The following tables detail the amortized cost, carrying value and
estimated fair value of the Company's investments and mortgage-backed
securities:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
At December 31, 2001 Cost Gains Losses Value Value
- --------------------------------------------------------------------------------------------------------------
Available for Sale:
- --------------------------------------------------------------------------------------------------------------
Equity Investments $ 1,923 $ -- $ -- $ 1,923 $ 1,923
U.S. Government Agencies 2,770 4 -- 2,774 2,774
Bank deposits 440 -- -- 440 440
Corporate bonds 1,919 -- 374 1,545 1,546
Mortgage-backed securities 205,741 806 1,401 205,146 205,146
- --------------------------------------------------------------------------------------------------------------
Total available for sale securities $212,793 $ 810$ $ 1,775 $ 211,828 $211,828
==============================================================================================================
Held to Maturity:
- --------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank Stock $ 6,500 $ -- $ -- $ 6,500$ 6,500
U.S. Government Agencies 16,808 81 170 16,719 16,808
Municipal bonds 14,865 240 304 14,801 14,865
- --------------------------------------------------------------------------------------------------------------
Total held to maturity securities $ 38,173 $ 321 $ 474 $ 38,020 $ 38,173
==============================================================================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
At December 31, 2000 Cost Gains Losses Value Value
- --------------------------------------------------------------------------------------------------------------
Available for Sale:
- --------------------------------------------------------------------------------------------------------------
Equity Investments $ 5,436 $ 4 $ 2,446 $ 2,994 $ 2,994
U.S. Government Agencies 16,524 163 -- 16,687 16,687
Bank deposits 447 -- -- 447 447
Corporate bonds 1,913 -- 343 1,570 1,570
- --------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 183,475 1,561 1,568 183,468 183,468
- --------------------------------------------------------------------------------------------------------------
Total available for sale securities $207,795$ 1,728$ $ 4,357 $ 205,166 $205,166
==============================================================================================================
Held to Maturity:
Federal Home Loan Bank Stock $ 6,350 $ -- $ -- $ 6,350 $ 6,350
U.S. Government Agencies 20,755 360 1,885 19,230 20,755
- --------------------------------------------------------------------------------------------------------------
Municipal bonds 14,835 202 392 14,645 14,835
- --------------------------------------------------------------------------------------------------------------
Total held to maturity securities $ 41,940 $ 562 $ 2,277 $ 40,225 $ 41,940
==============================================================================================================
Investment and mortgage-backed securities pledged as collateral for
FHLB borrowings amounted to $104.0 million and $79.3 million at December 31,
2001 and 2000, respectively. Investment securities pledged to the Federal
Reserve Bank for Small Business Administration loans amounted to $1.0 million at
both December 31, 2001 and 2000. Investment and mortgage-backed securities
pledged under agreements to repurchase in connection with borrowings amounted to
$24.3 million and $70.8 million at December 31, 2001 and 2000, respectively.
Investment and mortgage-backed securities pledged as collateral for public funds
amounted to $15.1 million and $10.8 million at December 31, 2001 and 2000,
respectively. Investment and mortgage-backed securities pledged to the Federal
Reserve Bank to secure borrowings and Treasury, Tax and Loan balances amounted
to $1.2 million and $1.7 million at December 31, 2001 and 2000, respectively.
37
The amortized cost and estimated fair value of the Company's debt
securities at December 31, 2001 by contractual maturity are shown below.
Expected maturities will differ from contractual maturities due to the right to
call or prepay such obligations with or without prepayment penalties.
Mortgage-backed securities mature over the life of the security through regular
principal payments and are subject to prepayment risk.
Amortized Estimated Fair
At December 31, 2001 Cost Value
- --------------------------------------------------------------------------------
Available for Sale:
Due one year or less $ 2,220 $ 2,220
Due after one year through five years 1,000 1,004
Due five years through ten years -- --
Due after ten years 1,909 1,535
Mortgage-backed securities 205,741 205,146
- --------------------------------------------------------------------------------
Total debt securities available for sale $ 210,870 $209,905
================================================================================
Held to Maturity:
Due five years through ten years $ 787 $ 792
Due after ten years 30,886 30,728
- --------------------------------------------------------------------------------
Total debt securities held to maturity $ 31,673 $ 31,520
================================================================================
Proceeds from sales of investment and mortgage-backed securities
available for sale were $127.3 million, $4.9 million and $15.9 million in 2001,
2000 and 1999, respectively. Proceeds from maturities and calls of investment
and mortgage-backed securities available for sale were $1.2 million, $5.4
million and $1.2 million in 2001, 2000 and 1999, respectively. Proceeds from
calls of investment securities held to maturity were $5.1 million in 2001.
Total realized gains in 2001, 2000 and 1999 on the sale of investment
and mortgage-backed securities classified as available for sale were $2.9
million, $1.9 million and $439,000, respectively. Total realized losses in 2001,
2000 and 1999 on the sale of investment and mortgage-backed securities
classified as available for sale were $2.3 million, $287,000 and $446,000,
respectively. Net realized losses included above on the sale of equity
securities available for sale acquired through the exercise of client warrants
of $2.0 million was recorded in client warrant income during 2001. Net realized
gains included above on the sale of equity securities available for sale
acquired through the exercise of client warrants of $1.1 million and $349,000
was recorded in client warrant income during 2000 and 1999, respectively.
Additionally, realized gains on calls of mortgage-backed securities in 1999 were
$8,000. During 2001 equity securities available for sale were written down by
$452,000 due to impairments.
During 1999, the Company transferred $9.7 million in investments
securities from the available for sale to the held to maturity category. The
investments were transferred at fair value. Unrealized losses, net of tax, on
the date of transfer amounted to $89,000. The remaining unrealized losses, net
of tax, were $48,000 and $64,000 at December 31, 2001 and 2000, respectively,
and are reported in net accumulated other comprehensive income.
(7) Loans and Leases, Net
The components of loans and leases at December 31, 2001 and 2000 are
detailed below:
At December 31, 2001 2000
----------------------------------------------------------------------------------------------------
Commercial business $123,546 $175,972
Commercial real estate 195,105 178,874
Construction (net of loans in process of $69,066 and $56,270, respectively) 77,380 60,172
Single-family residential real estate 26,518 34,676
Consumer loans 44,821 37,242
Lease financing 43,342 66,166
Unearned income (5,770) (9,983)
Allowance for loan and lease losses (9,917) (7,407)
----------------------------------------------------------------------------------------------------
Total loans and leases, net $495,025 $535,712
====================================================================================================
38
The following table sets forth the recorded investment in impaired
loans, recognized in accordance with SFAS Nos. 114 and 118 "Accounting by
Creditors for Impairment of a Loan," and the related valuation allowance for
each loan category as of December 31, 2001 and 2000:
Amount in the Amount in the
Recorded Recorded
Investment for Investment for Total
Which There is a Which There is Recorded
Related No Related Investment in Amount of
Allowance for Allowance for the Impaired Allowance for
Loan Losses Loan Losses Loans Loan Losses
-----------------------------------------------------------------------------------------------------
At December 31, 2001
-----------------------------------------------------------------------------------------------------
Commercial business $10,661 $ -- $10,661 $2,039
Commercial real estate 4,513 -- 4,513 678
Construction -- -- -- --
-----------------------------------------------------------------------------------------------------
Total $15,174 $ -- $15,174 $2,717
-----------------------------------------------------------------------------------------------------
At December 31, 2000
-----------------------------------------------------------------------------------------------------
Commercial business $ 3,970 $ -- $ 3,970 $ 512
Commercial real estate 2,414 -- 2,414 237
Construction -- -- -- --
-----------------------------------------------------------------------------------------------------
Total $ 6,384 $ -- $ 6,384 $ 749
-----------------------------------------------------------------------------------------------------
Primarily all of the impaired loans were measured based on the fair
value of collateral. Interest income on impaired loans other than non-accrual
loans, is recorded on an accrual basis. The average recorded investment in
impaired loans for the years ended December 31, 2001, 2000 and 1999 were $12.3
million, $3.8 million and $1.8 million, respectively. Interest income recognized
on impaired loans totaled $538,000 for 2001, $176,000 for 2000 and $56,000 for
1999.
The Company is a lessor of equipment and machinery under agreements
expiring at various dates through the Year 2006. At December 31, 2001, the
components of lease financing are as follows:
2002 $22,063
2003 12,567
2004 6,033
2005 1,952
2006 727
-------------------------------------------------------------------
Total future minimum lease payments receivable
including estimated residual value of $1,519 43,342
Unearned income (5,770)
-------------------------------------------------------------------
Total lease financing receivables $37,572
===================================================================
During 2000, the Company sold its Maryland-based leasing division that
resulted in the sale of $31.0 million in lease financing receivables.
At December 31, 2001, 2000 and 1999, the Company was servicing loans,
including participations sold, in the amounts of $106.8 million, $219.5 million
and $240.4 million, respectively, for the benefit of others.
Loans and lease receivables from executive officers and directors,
including loans and leases to related persons and entities, and affiliates
consisted of the following activity:
For the years ended December 31, 2001 2000 1999
--------------------------------------------------------------------------------
Balances at beginning of year $4,353 $6,225 $3,327
Additional loans and leases granted 5,086 5,950 5,535
Repayments (594) (7,822) (2,637)
--------------------------------------------------------------------------------
Balances at end of year $8,845 $4,353 $6,225
================================================================================
39
The following is a summary of the activity in the allowance for loans
and lease losses:
For the years ended December 31, 2001 2000 1999
---------------------------------------------------------------------------------------
Balance at beginning of year $7,407 $5,927 $4,490
Provisions for loan and lease losses, 7,116 4,416 3,548
Losses charged against the allowance (5,299) (3,618) (2,554)
Recoveries on charge-off loans 693 682 443
---------------------------------------------------------------------------------------
Balance at end of year $9,917 $7,407 $5,927
=======================================================================================
(8) Loans Held for Sale
At December 31, 2001, the Company held $23.3 million in commercial
business loans and $2.3 million in commercial real estate loans classified as
held for sale and carried at the lower of aggregate cost or market value. There
were no loans held for sale at December 31, 2000.
(9) Investments in Unconsolidated Entities
Investments in Unconsolidated Entities at December 31, 2001 and 2000
are detailed below:
At December 31, 2001 2000
----------------------------------------------------------------------------
Investment in Ben Franklin/Progress Capital Fund, L.P. (A) $1,983 $2,202
Other investments in unconsolidated entities (B) 2 7,064
----------------------------------------------------------------------------
Total $1,985 $9,266
============================================================================
(A) The Company owns approximately 36% of the Ben Franklin/Progress
Capital Fund, L.P. ("Ben Franklin"), which was formed on December
30, 1997, and accounts for its investment under the equity method.
Financial statements for Ben Franklin are filed herewith as Exhibit
99. Condensed financial data of Ben Franklin follows:
For the years ended December 31, 2001 2000 1999
-------------------------------------------------------------------------------------------------
Summary of Operations
-------------------------------------------------------
Revenues $343 $ 517 $ 357
Expenses 312 308 294
Net increase (decrease) in investment valuation 399 (5,059) 6,725
-------------------------------------------------------------------------------------------------
Net increase (decrease) in partners' capital
resulting from operations $430 $(4,850) $6,788
=================================================================================================
The Company's equity (loss) in Ben Franklin $199 $(2,024) $2,822
=================================================================================================
At December 31, 2001 2000
-------------------------------------------------------------------------------------------------
Balance Sheet Data
-------------------------------------------------------
Assets:
Venture capital investments, at fair value $4,258 $ 4,135
Cash and temporary investments 1,412 1,503
Other assets 72 181
-------------------------------------------------------------------------------------------------
Total assets $5,742 $ 5,819
=================================================================================================
Liabilities and Partners' Capital:
Liabilities $ 910 $ 17
Partners' capital 4,832 5,802
-------------------------------------------------------------------------------------------------
Total liabilities and partners' capital $5,742 $ 5,819
=================================================================================================
(B) Includes a $4.0 million investment at December 31, 2000 in New
Seasons Assisted Living Communities ("New Seasons") Series "C"
preferred stock, accounted for under the cost method; a $2.2
million investment at December 31, 2000 Progress Development I L.P.
("PD I"), owned 50% by the Company and accounted for under the
equity method; and a $804,000 investment at December 31, 2000, in
NewSpring Venture Fund, L.P. (NewSpring"), accounted for under the
equity method.
During 2001, the Company sold its investments in: New Seasons for a
gain of $708,000, included in gains (losses) on sales of
securities; PD I for a loss of $162,000, included in gain on sale
of investments in unconsolidated entities; and NewSpring for a gain
of $964,000 included in gain on sale of investments in
unconsolidated entities.
40
(10) Premises and Equipment
Land, office buildings and equipment, at cost, are summarized by major
classification:
--------------------------------------------------------------------------------------------
At December 31, Estimated Life 2001 2000
--------------------------------------------------------------------------------------------
Premises and Equipment Occupied by Company:
Land $4,691 $ 3,014
Buildings and leasehold improvements (40 years or lease term) 14,093 8,930
Furniture, fixtures and equipment (3-5 years) 10,527 12,888
--------------------------------------------------------------------------------------------
29,311 24,832
Accumulated depreciation (6,620) (10,238)
--------------------------------------------------------------------------------------------
Total premises and equipment occupied by Company 22,691 14,594
--------------------------------------------------------------------------------------------
Property Held for Lease:
Buildings and leasehold improvements (40 years or lease term) 3,816 4,132
Accumulated depreciation (469) (383)
--------------------------------------------------------------------------------------------
Total property held for lease 3,347 3,749
--------------------------------------------------------------------------------------------
Total Premises and Equipment, Net $26,038 $18,343
============================================================================================
Depreciation expense for the years ended December 31, 2001, 2000 and
1999, was $2.3 million, $2.2 million and $1.4 million, respectively.
At December 31, 2001, the Company leased a number of its office
facilities. The leases provide a schedule of minimum rent for each lease year or
provide for a minimum rental for each lease year as a stated percentage increase
or based upon the consumer price index increase. Generally, the leases provide
for the option to renew with specified terms. At December 31, 2001, minimum
future non-cancelable rental payments under operating leases are as follows:
-------------------------------------------------------
Premises and Equipment Occupied by Company:
-------------------------------------------------------
2002 $1,453
2003 1,477
2004 1,415
2005 1,288
2006 1,144
-------------------------------------------------------
Total $6,777
=======================================================
Rental expense for the years ended December 31, 2001, 2000, and 1999
was $1.8 million, $1.7 million and $1.2 million, respectively.
The Company was the lessor of office space on two of its properties.
The leases provide a schedule of minimum rent for each lease year and several
leases provide for the option to renew with specified terms. At December 31,
2001, minimum future non-cancelable rental payments to be received under
operating leases are as follows:
--------------------------------
Property Held for Lease:
--------------------------------
2002 $686
2003 410
2004 206
2005 104
--------------------------------
Total $1,406
================================
(11) Other Assets
The following items are included in other assets:
At December 31, 2001 2000
---------------------------------------------------
Servicing rights $ 246 $ 170
Accounts receivable 5,418 2,076
Goodwill 1,974 3,042
Other real estate owned 1,533 1,750
Other assets 1,657 1,716
---------------------------------------------------
Total $10,828 $8,754
===================================================
41
Servicing rights include $194,000 and $58,000 of SBA Loan servicing
rights at December 31, 2001 and 2000, respectively; $52,000 and $76,000 of
originated mortgage servicing rights at December 31, 2001 and 2000,
respectively; and $36,000 of purchased mortgage servicing rights at December 31,
2001. Servicing rights have been capitalized in accordance with SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." At December 31, 2001, 2000 and 1999, the Company was servicing
loans, including participations sold, in the amounts of $106.8 million, $219.5
million and $240.4 million, respectively, for the benefit of others.
Goodwill decreased from $3.0 million at December 31, 2000 to $2.0
million at December 31, 2001 due to amortization of $257,000, writedowns of
$440,000, related to the de-emphasis on leasing, and $371,000 due to the sale of
the AMIC division of PRA.
(12) Other Long-Term Debt
Other long-term debt at December 31, 2001 and 2000 consist of the
following:
-----------------------------------------------------------------------
At December 31, 2001 2000
-----------------------------------------------------------------------
FHLB borrowings $117,000 $102,000
Securities sold under agreement to repurchase 19,000 10,000
Employee Stock Ownership Plan note payable 1,368 --
-----------------------------------------------------------------------
Total $137,368 $112,000
=======================================================================
At December 31, 2001 there were $20.0 million in fixed rate FHLB
long-term borrowings at rates ranging from 5.345% to 5.55%. At December 31, 2001
the Company had $97.0 million of FHLB long-term borrowings that contained a
provision whereby, at the option of the FHLB, the borrowing may be converted
from a fixed rate, ranging from 4.77% to 6.85%, to a LIBOR adjustable rate
advance for the remaining term of the advance. However, the Company may choose
not to accept the adjustable rate advance and would have the option, at that
time, to put the borrowing back to the FHLB without penalty. During 2001, $10.0
million in FHLB borrowing were called and out back to the FHLB. At December 31,
2001, FHLB borrowings were secured by approximately $201.3 million in certain
investment and mortgage-backed securities and $52.8 million in certain mortgage
loans. At December 31, 2001 aggregate maturities of the FHLB borrowings were:
$25.0 million in 2003; $20.0 million in 2004; $26.0 million in 2005; $15.0
million in 2008; and $21.0 million in 2010. Of these borrowings $97.0 million
are callable at dates ranging from 2002 through 2005.
At December 31, 2001 there were $19.0 million in securities purchased
under agreement to resell at fixed rates ranging from 5.05% to 5.61%, scheduled
to mature in 2003.
At December 31, 2001 there was a $1.4 million fixed rate Employee Stock
Ownership Plan ("ESOP") note payable at 7.50%. The note is payable in quarterly
installments through the year 2011. Under the note agreement, the Bank must
maintain minimum regulatory capital ratios; as of December 31, 2001 these
requirements were met. During 2001, $132,000 of the ESOP note payable was
reclassified to short-term borrowings as its maturity become less than one year.
(13) Early Extinguishment of Debt
In December 2001, the Company used current cash on hand to prepay $10.0
million in long-term FHLB Advances scheduled to mature in 2003. The transaction
resulted in a net extraordinary loss of $199,000 (loss of $301,000 gross of a
tax benefit of $102,000) or $.03 loss per share
(14) Subordinated Debt
The subordinated debt consists of 12 units of $250,000 notes payable
June 30, 2004. The notes are redeemable at the Company's option at a price of
105% of par after July 1, 1996, declining annually thereafter to par on and
after July 1, 2003. Interest is paid quarterly. The terms of the notes limit the
Company's aggregate amount of long-term senior indebtedness to an amount equal
to or less than the Company's net worth. At December 31, 2001, the Company's net
worth was $47.6 million greater than its aggregate long-term senior
indebtedness.
42
(15) Income Taxes
Income tax expense, including tax expense on the gain on sale of
discontinued operation of $1.0 million in 2000, tax expense on discontinued
operations of $30,000 and $442,000 in 2000 and 1999, respectively, and the tax
benefit of $102,000 on the extraordinary loss in 2001, consisted of the
following:
---------------------------------------------------------------------------------------------
For the years ended December 31, 2001 2000 1999
---------------------------------------------------------------------------------------------
Current:
Federal $ 1,762 $ 5,716 $2,664
State 25 525 (14)
Deferred:
Federal (1,621) (2,104) 888
State 34 (56) 5
---------------------------------------------------------------------------------------------
Total income tax expense $ 200 $ 4,081 $3,543
=============================================================================================
The provision for income taxes differs from the statutory rate due to
the following:
---------------------------------------------------------------------------------------------
For the years ended December 31, 2001 2000 1999
---------------------------------------------------------------------------------------------
Tax at statutory rate $ 253 $ 3,869 $ 3,473
State tax, net of Federal effect 39 310 (6)
Interest on non-taxable loans and securities (305) (260) (140)
Non-deductible goodwill 65 65 98
Non-deductible meals and entertainment 102 101 103
Restricted stock 36 -- --
Other 10 (4) 15
---------------------------------------------------------------------------------------------
Total income tax expense $ 200 $ 4,081 $ 3,543
=============================================================================================
Deferred income taxes reflect the impact of differences between the
financial statement and tax basis of assets and liabilities and available tax
carryforwards. The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and deferred tax liabilities at
December 31, 2001 and 2000 are presented below:
----------------------------------------------------------------------------------------
At December 31, 2001 2000
----------------------------------------------------------------------------------------
Deferred tax assets:
Unrealized loss on securities available for sale $ 353 $ 927
Provision for loan and lease losses 3,377 2,490
Goodwill 890 876
Other 219 153
----------------------------------------------------------------------------------------
Total deferred tax assets 4,839 4,446
----------------------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized gain on client warrants -- 666
Deferred loan and lease costs 849 1,098
Direct finance lease receivable 283 350
Investments in unconsolidated entities 43 27
Depreciation and amortization 241 25
Other 193 63
----------------------------------------------------------------------------------------
Total deferred tax liabilities 1,609 2,229
----------------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $3,230 $ 2,217
========================================================================================
A valuation allowance has not been provided at December 31, 2001 and
2000 since management believes it is more likely than not that the deferred tax
assets will be realized.
43
(16) Commitments and Contingencies
The Company is a party to various financial instruments required in the
normal course of business to meet the financing needs of its customers, which
are not included in the Consolidated Statements of Financial Condition at
December 31, 2001. Management does not expect any material losses from these
transactions. The Company's involvement in such financial instruments is
summarized as follows:
---------------------------------------------------------------------------------------------------------
At December 31, 2001 2000
---------------------------------------------------------------------------------------------------------
Contract or Notional Amount
-----------------------------
Amounts representing credit risk:
Commitments to extend credit (including unused lines of credit) $179,402 $234,563
Standby letters of credit, financial guarantees and other letters of credit 12,068 12,232
The Company uses the same credit policies in extending commitments and
letters of credit as it does for on-balance sheet instruments. The Company
controls its exposure to loss from these agreements through credit approval
processes and monitoring procedures. Letters of credit and commitments to extend
credit are generally issued for one year or less and may require payment of a
fee. The total commitment amounts do not necessarily represent future cash
disbursements, as many of the commitments expire without being drawn upon. The
Company may require collateral in extending commitments, which may include cash,
accounts receivable, securities, real or personal property, or other assets. For
those commitments which require collateral, the value of the collateral
generally equals or exceeds the amount of the commitment.
The majority of the Company's commitments to extend credit and letters
of credit carry current market interest rates if converted to loans. Because
commitments to extend credit and letters of credit are generally unassignable by
either the Company or the borrower, they only have value to the Company and the
borrower. The estimated fair value approximates the recorded deferred fee
amounts.
(17) Risks and Uncertainties
At December 31, 2001, the Company was party to a number of lawsuits.
While any litigation has an element of uncertainty, after reviewing these
actions with legal counsel, management is of the opinion that the liability, if
any, resulting from these actions will not have a material effect on the
financial condition or results of operations of the Company.
On August 29, 2001, a shareholder's derivative action was filed
against the Company and its directors in the Delaware Chancery Court alleging
failure to comply with the Home Owners' Loan Act, insider trading, and breach of
their fiduciary duty. The plaintiff demands judgment against the Company and its
directors for the amount of damages sustained by the Company as result of the
directors' breaches of fiduciary duty, awarding the plaintiff the costs and
disbursements of the actions, including expenses of the lawsuit and granting
such other and further relief as the Court may deem just and proper. The Company
believes that this action is without merit and is defending the action
vigorously. On December 7, 2001 the Company filed an Opening Brief and Motion to
Dismiss the Complaint, which the plaintiff filed an opposition to on January 25,
2002. On March 8, 2002 the Company filed a Reply Brief in support if its motion
to dismiss.
(18) Related Party Transactions
The Company receives management fees from Ben Franklin and other
unconsolidated entities for accounting and advisory services. For the years
ended December 31, 2001, 2000 and 1999, the Company recorded management fees
from Ben Franklin of $272,000 per year. Aggregate management fees from other
unconsolidated entities were $2.2 million, $2.0 million and $414,000 during
2001, 2000 and 1999, respectively.
Ben Franklin has a certificate of deposit and transaction accounts with
the Bank that totaled $1.9 million and $1.5 million at December 31, 2001 and
2000, respectively. Aggregate transaction accounts that other unconsolidated
entities had with the Bank totaled $1.8 million at December 31, 2000.
(18) Benefit Plans
The Company has a savings plan under Section 401(k) of the Internal
Revenue Code available to all full-time employees. The plan allows employees to
contribute part of their pretax or after-tax income according to specified
guidelines. The Company matches a percentage of the employee contributions up to
a certain limit. This expense amounted to $306,000, $359,000 and $284,000 for
the years 2001, 2000 and 1999, respectively.
44
(20) Capital Securities
In July 2000, the Company issued 6,000 shares, or $6.0 million, of
11.445% trust preferred securities, $1,000 liquidation amount per security, due
July 19, 2030 (the "Trust Preferred Securities"), in a private offering managed
by First Union Securities, Inc. The Trust Preferred Securities represent
undivided beneficial interests in Progress Capital Trust II (the "Trust II"), a
statutory business trust created under the laws of Delaware, which was
established by the Company for the purpose of issuing the Trust Preferred
Securities. The Company has fully, irrevocably and unconditionally guaranteed
all of the Trust II's obligations under the Trust Preferred Securities. Net
proceeds from the sale of the securities were used for general purposes,
including but not limited to, capital contributions to the Bank to fund its
growth and for repurchases of the Company's common stock under its existing
stock repurchase program.
During 1997 the Company issued $15.0 million of 10.5% capital
securities due June 1, 2027 (the "Capital Securities"). The Capital Securities
were issued by the Company's recently formed subsidiary, Progress Capital Trust
I, a statutory business trust created under the laws of Delaware. The Company is
the owner of all of the common securities of the Trust (the "Common
Securities"). The Trust issued $15.0 million of 10.5% Capital Securities (and
together with the Common Securities, the "Trust Securities"), the proceeds from
which were used by the Trust, along with the Company's $464,000 capital
contribution for the Common Securities, to acquire $15.5 million aggregate
principal amount of the Company's 10.5% Junior Subordinated Deferrable Interest
Debentures due June 1, 2027 (the "Debentures"), which constitute the sole assets
of the Trust. The Company has, through the Declaration of Trust establishing the
Trust, Common Securities and Capital Securities Guarantee Agreements, the
Debentures and a related Indenture, taken together, irrevocably and
unconditionally guaranteed all of the Trust's obligations under the Trust
Securities.
(21) Shareholders' Equity
Office of Thrift Supervision Directive
During July 2001, the Company's Board of Directors approved a
resolution to comply with the terms of a directive issued by the Office of
Thrift Supervision ("OTS") that requires the Bank to (i) reduce its lending to
early stage technology companies; (ii) increase its leverage capital ratio to no
less than 8.0% and its total risk-basked capital ratio to no less than 14.0% by
April 1, 2002 through gradual compliance; and (iii) increase its valuation
allowance and implement improved credit review and monitoring programs. In
addition, the Company will not pay cash dividends on its capital stock until the
Bank achieves the required capital levels and has implemented an acceptable
capital plan. As such, the Company has suspended the quarterly cash dividend on
its common stock and its stock repurchase program and has undertaken measures to
achieve capital compliance as promptly as possible. The increased capital levels
reflect the Bank's level of business lending particularly in the technology
sector and continued economic concerns. As of December 31, 2001 the Bank was in
compliance with the terms of the OTS Directive.
Common Stock Offerings and Repurchase Programs
On May 15, 1998 the Company completed a secondary offering of 792,800
shares of common stock at a price of $19.50 per share. During 1998, the Company
announced a plan to repurchase up to 357,000 shares of common stock of which
231,300 shares had been repurchased at December 31, 1998 and 125,700 shares were
repurchased during 1999. In 1999, the Company announced the authorization of a
stock repurchase program under which the Company may repurchase up to 280,000 or
five percent, of its outstanding common stock of which 76,800 common shares were
repurchased in 1999 and 203,200 shares were repurchased during 2000. During
2000, the Company announced the authorization of a new stock repurchase program
under which the Company may repurchase up to 285,000 or five percent, of its
outstanding common stock of which 2,300 and 147,500 shares were repurchased
during 2000 and 2001, respectively. As discussed above, repurchases have been
suspended since June 30, 2001 until the Bank has achieved capital compliance
under the OTS directive.
Warrants
In 1994, the Company completed the sale of $3.0 million in subordinated
debentures in a private placement. Nine whole units and six half units were
sold, ranging from $125,000 to $250,000 in principal amount of 8.25%
subordinated notes due in 2004 and warrants to purchase 13,781 to 27,562 shares
of common stock. Each warrant entitles the holder to purchase one share of the
Company's common stock at an exercise price of $5.44. The warrants were
exercisable in whole or in part, at any time prior to June 30, 1999. During 1999
and 1998, 248,059 and 26,250 shares were issued under these warrants,
respectively. Interest on the subordinated debentures is payable quarterly. The
subordinated debentures are due June 30, 2004 and are redeemable after July 1,
1996.
45
Employee Stock Ownership Plan
The Company's ESOP is a defined contribution plan covering all full-time
employees of the Company who have one year of service and are age 21 or older.
It is subject to the provisions of the Employee Retirement Income Security Act
of 1974 ("ERISA"). The Company follows the provisions of SOP 93-6, "Employers'
Accounting for Employee Stock Ownership Plans" in accounting for the ESOP. In
January 1996, the ESOP borrowed funds from a third party and purchased 50,000
shares (57,881 shares after the effects of the stock dividends) of the Company's
stock for the ESOP trust. The 1996 guaranteed ESOP obligation was paid off
during 2000 and all ESOP shares purchased with the proceeds were allocated. In
June 2001, the ESOP borrowed funds from a third party to purchase 188,700 shares
of the Company's stock to be distributed for the ESOP trust. Cash contributions
to the ESOP have been determined based on the ESOP's total debt service less
dividends paid on ESOP shares. Compensation expense of the ESOP was $50,000,
$165,000 and $154,000 for 2001, 2000 and 1999, respectively. Interest expense on
the borrowings was $58,000, $3,000 and $8,000 for 2001, 2000 and 1999,
respectively.
Employee Stock Purchase Plan
In April 1996, the Company established an Employee Stock Purchase Plan
("ESPP") under which 121,551 shares were reserved for issuance. Employees can
elect to purchase shares in the Company at 95% of the market price of the
Company's stock on certain dates throughout the year. During 2001, 2000 and
1999, 40,309, 25,451 and 20,641 shares, respectively, were issued to employees
through their participation in the ESPP. These transactions increased
shareholders' equity by $273,000, $288,000 and $220,000 during 2001, 2000 and
1999, respectively. At December 31, 2001 14,250 shares remained under the ESPP
for issuance.
Restricted Stock Award Plan
In February 1999 the Board of Directors adopted a Restricted Stock
Award Plan under which 85,443 shares of common stock were reserved for grant to
certain employees of the Company's subsidiary Progress Financial Resources, Inc.
The awards have a five-year vesting period and are accounted for in accordance
with Accounting Principles Board Opinion No. 25, and related interpretations,
which provide for compensation expense to be measured at the grant date and
recognized as the awards vest. During 1999, the Company granted 14,337 and
68,793 shares, issued at market prices of $11.32 and $13.14 per share,
respectively. During 2000, the Company granted 1,512 shares issued at $11.90 per
share. During 2001, the Company granted 2,000 shares issued at $7.06 per share.
Retirements during 2001, 2000 and 1999 amounted to 40,352, 84 and 1,400 shares,
respectively. During 2001 and 2000, 18,370 and 16,346 shares vested,
respectively. At December 31, 2001 there were 10,090 unvested shares with an
average issuance price of $10.55 per share and a weighted average contractual
remaining life of 2.6 years and 40,637 shares remaining for issuance. The
Company accrued $80,000, $213,000 and $184,000 in compensation expense relating
to the awards in 2001, 2000 and 1999, respectively.
Stock Incentive Plans
In 1993, as amended in 1997, 1998 and 1999, the Board of Directors
adopted a Stock Incentive Plan which provides for the grant of incentive stock
options, non-qualified stock options and stock appreciation rights to key
employees. The per share exercise price of an incentive stock option shall at
least equal the fair market value of a share of Common Stock on the date the
option is granted, and the per share exercise price of a non-qualified stock
option shall at least equal the greater of par value or 85% of fair market value
of a share of Common Stock on the date the option is granted. Under this plan,
635,013 shares of common stock were reserved for issuance of which 2,458 shares
remained for future grants at December 31, 2001. All options were granted at the
fair market value and have a one- to five-year vesting period.
Under the Directors' Plan, which was also adopted in February 1993, and
amended in 1997, each non-employee director of the Company will receive
non-qualified options to purchase 607 shares (or such less number of shares as
remain to be granted pursuant to the Directors' Plan) with an exercise price
equal to the fair market value of a share of Common Stock on the date the option
is granted. Additional options may be granted based on the level of business
referrals to the Company. A total of 109,395 authorized but unissued shares of
Common Stock have been reserved for issuance pursuant to the Directors' Plan. At
December 31, 2001, no shares remained in the reserve for future grants.
In 2000, the Board of Directors adopted the 2000 Incentive Stock Option
Plan which provides for the grant of incentive stock options, non-qualified
stock options and stock appreciation rights to officers and employees and
non-qualified stock options to non-employee directors. The per share exercise
price of an incentive stock option or non-qualified stock option shall at least
equal to the greater of the par value or the fair market value of a share of
Common Stock on the date the
46
option is granted. Under this plan, 210,000 shares of common stock were reserved
for issuance; of which 115,312 shares remained for future grants at December 31,
2001. All options were granted at the fair market value and have vesting periods
up to five years.
Options granted under each of these fixed plans are exercisable during
the period specified in each option agreement and expire no later than the tenth
anniversary of the date the option was granted. A summary of the Company's fixed
stock option plans as of December 31, 2001, 2000 and 1999 and changes during the
years ended on those dates is presented below:
Weighted Average
For the year ended December 31, 2001 Shares Under Option Exercise Price
----------------------------------------------------------------------------------------------------
Outstanding at beginning of year 655,535 $ 7.8808
Granted during year 151,609 7.7258
Exercised during year (2,000) 2.8794
Forfeited during year (2,458) 9.3245
----------------------------------------------------------------------------------------------------
Outstanding at end of year 802,686 $ 7.8596
====================================================================================================
Options exercisable at end of year 611,465 $ 7.3236
====================================================================================================
For the year ended December 31, 2000
----------------------------------------------------------------------------------------------------
Outstanding at beginning of year 550,966 $ 7.0798
Granted during year 111,970 11.6208
Exercised during year (5,518) 2.9447
Forfeited during year (1,883) 10.3460
----------------------------------------------------------------------------------------------------
Outstanding at end of year 655,535 $ 7.8808
====================================================================================================
Options exercisable at end of year 514,010 $ 6.6879
====================================================================================================
For the year ended December 31, 1999
----------------------------------------------------------------------------------------------------
Outstanding at beginning of year 528,734 $ 6.1618
Granted during year 103,849 12.2254
Exercised during year (38,831) 1.5823
Forfeited during year (42,786) 13.2145
----------------------------------------------------------------------------------------------------
Outstanding at end of year 550,966 $ 7.0798
====================================================================================================
Options exercisable at end of year 439,899 $ 6.0360
====================================================================================================
The following table summarizes information about fixed stock options at
December 31, 2001:
Options Outstanding Options Exercisable
------------------------------------------------ --------------------------------
Weighted Average Weighted Number of Weighted
Range of Number Remaining Average Shares Average
Exercise Prices of Shares Contractual Life Exercise Price Exercisable Exercise Price
---------------- ------------------------------------------------- --------------------------------
$ 2.88 - 4.00 146,999 1.6 $ 2.9990 146,999 $ 2.9990
4.01 - 7.00 260,325 5.1 6.1791 242,825 6.1639
7.01 - 10.00 138,297 9.2 7.8529 47,547 8.0493
10.01 - 13.00 218,280 7.5 11.8991 143,988 11.8972
13.01 - 15.66 38,785 6.3 14.8510 30,106 14.7723
---------------- ------------------------------------------------- --------------------------------
$ 2.88 - 15.66 802,686 5.9 $ 7.8596 611,465 $ 7.3236
================ ================================================= ================================
47
Pro Forma Stock Based Compensation
In October 1995, the FASB issued the Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which
is effective for the Company January 1, 1996. The Company adopted the
disclosure-only provision of SFAS 123 and continues to apply Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its plans. If the Company had elected to recognize compensation cost for the
various Option Plans and Restricted Stock Award Plan based on the fair value at
the grant dates for awards under those plans, consistent with the method
prescribed by SFAS 123, the net income and net income per share for the years
ended December 31, 2001, 2000 and 1999 would have been reduced to the pro forma
amounts indicated below:
----------------------------------------------------------------------------------
For the year ended December 31, 2001 2000 1999
----------------------------------------------------------------------------------
Income from Continuing Operations:
As reported $743 $5,657 $6,032
Pro forma 417 5,309 5,728
Basic income from continuing operations
per common share:
As reported .13 .98 1.04
Pro forma .07 .92 .99
Diluted income from continuing
operations per common share:
As reported .13 .95 .99
Pro forma .07 .89 .94
Net income:
As reported 544 7,299 6,671
Pro forma 218 6,951 6,367
Basic earnings per share:
As reported .10 1.26 1.15
Pro forma .04 1.20 1.10
Diluted earnings per share:
As reported .10 1.22 1.10
Pro forma .04 1.16 1.05
The fair value of Company stock options used to compute pro forma net
income and net income per share disclosures is the estimated present value at
grant date using the Black-Scholes option-pricing model with the following
weighted average assumptions for 2001, 2000 and 1999, dividend yield of 2.589%,
1.694% and 1.407%; expected volatility of 39.032%, 28.011% and 37.619%; risk
free interest rate of 4.954%, 6.517% and 6.182%; and an expected holding period
of 8.88 years, 8.84 years and 7.00 years, respectively. The weighted average
fair value per share of options granted during 2001, 2000 and 1999 was $3.0671,
$4.7451 and $5.3714, respectively.
Earnings Per Share
The following table presents a summary of per share data and the
amounts for the periods included. All prior period information has been restated
to reflect the 5% stock dividends distributed to shareholders on August 11,
2000.
Per Share
For the year ended December 31, 2001 Income Shares Amount
----------------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Income from continuing operations available to common
shareholders $743 5,599,358 $.13
Extraordinary loss on early extinguishment of debt (199) 5,599,358 (.03)
--- --
Total income available to common shareholders 544 5,599,358 $.10
Effect of Dilutive Securities:
Warrants -- -- --
Options -- 118,209 --
---------
Diluted Earnings Per Share:
Income from continuing operations available to common
shareholders and assumed conversions 743 5,717,568 $.13
Extraordinary loss on early extinguishment of debt (199) 5,717,568 (.03)
--- ---
Total income available to common shareholders and assumed
conversions $544 5,717,568 $.10
==== ========= ====
48
Per Share
For the year ended December 31, 2000 Income Shares Amount
- ---------------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Income from continuing operations available to common
shareholders $ 5,657 5,793,607 $ .98
Gain on sale of discontinued operations 1,519 5,793,607 .26
Income from discontinued operations 123 5,793,607 .02
------- -----
Total income available to common shareholders 7,299 5,793,607 $1.26
=====
Effect of Dilutive Securities:
Warrants -- -- --
Options -- 190,987 --
--------
Diluted Earnings Per Share:
Income from continuing operations available to common
shareholders and assumed conversions 5,657 5,984,594 $ .95
Gain on sale of discontinued operations 1,519 5,984,594 .25
Income from discontinued operations 123 5,984,594 .02
------- -----
Total income available to common shareholders and assumed
conversions $ 7,299 5,984,594 $1.22
======= ========= =====
For the year ended December 31, 1999
- ----------------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Income from continuing operations available to common
shareholders $ 6,032 5,778,014 $1.04
Income from discontinued operations 639 5,778,014 .11
------- -----
Total income available to common shareholders 6,671 5,778,014 $1.15
-----
Effect of Dilutive Securities:
Warrants -- 76,685 --
Options -- 231,160 --
--------
Diluted Earnings Per Share:
Income from continuing operations available to common
shareholders and assumed conversions 6,032 6,085,859 $ .99
Income from discontinued operations 639 6,085,859 .11
------- -----
Total income available to common shareholders and assumed
conversions $ 6,671 6,085,859 $1.10
======= ========= =====
Capital Resources
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was signed into law on December 19, 1991; regulations implementing
the prompt corrective action provision of FDICIA became effective on December
19, 1992. In addition to the prompt corrective action requirements, FDICIA
includes significant changes to the legal and insured depository institutions,
including reductions in insurance coverage for certain kinds of deposits,
increased supervision by the federal regulatory agencies, increased reporting
requirements for insured institutions, and new regulations concerning internal
controls, accounting, and operations. The prompt corrective action regulations
defined specific capital categories based on an institution's capital ratios.
The capital categories, in declining order, are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." To be considered "well capitalized," an
institution must generally have a tangible equity ratio of at least 2%, a Tier 1
or leverage capital ratio of at least 5%, a Tier 1 risk-based capital ratio of
at least 6%, and a total risk-based capital ratio of at least 10%. An
institution is deemed to be "critically undercapitalized" if it has a tangible
equity ratio of 2% or less. Under the OTS directive discussed above, the Bank
must increase its leverage capital ratio to no less than 8.0% and its total
risk-basked capital ratio to no less than 14.0% by April 1, 2002 through gradual
compliance.
At December 31, 2001 and 2000, the Bank's tangible equity ratio was
7.88% and 6.46%, Tier 1 leverage capital ratio was 7.90% and 6.46%, Tier 1
risk-based capital ratio was 11.60% and 9.79% and total risk-based capital ratio
was 12.85% and 11.04%, respectively. These ratios were based on tangible equity
of $66.2 million and $57.9 million, Tier 1 leverage capital of $66.4 million and
$57.9 million, Tier 1 risk-based capital of $66.4 million and $57.9 million and
total risk-based capital of $73.6 million and $65.3 million, respectively. In
addition these ratios were based on adjusted total assets $840.3 million and
$896.9 million for the tangible equity ratio and $840.5 million and $896.9
million for Tier 1
49
leverage ratio, and risk-weighted assets of $572.6 million and $591.7 million at
December 31, 2001 and 2000, respectively. As of December 31, 2001, the Bank is
classified as "well capitalized."
The following is a reconciliation of the Bank's capital determined in
accordance with generally accepted accounting principles ("GAAP") to regulatory
tangible, leverage, and risk-based capital at December 31, 2001 and 2000:
-------------------------------------------------------------------------------------------------------------
Tier 1 or Tier 1 Total
Tangible Leverage Risk-Based Risk-Based
At December 31, 2001 Equity Capital Capital Capital
-------------------------------------------------------------------------------------------------------------
Total qualifying capital $66,201 $66,395 $66,395 $73,582
Capital ratio 7.88% 7.90% 11.60% 12.85%
Minimum capital adequacy requirement $16,806 $33,620 $22,904 $45,808
Minimum capital adequacy ratio 2.00% 4.00% 4.00% 8.00%
Regulatory capital excess $49,395 $32,775 $43,491 $27,774
-------------------------------------------------------------------------------------------------------------
Tier 1 or Tier 1 Total
Tangible Leverage Risk-Based Risk-Based
At December 31, 2000 Equity Capital Capital Capital
-------------------------------------------------------------------------------------------------------------
Total qualifying capital $57,921 $57,921 $57,921 $65,311
Capital ratio 6.46% 6.46% 9.79% 11.04%
Minimum capital adequacy requirement $17,938 $35,876 $23,667 $47,334
Minimum capital adequacy ratio 2.00% 4.00% 4.00% 8.00%
Regulatory capital excess $39,983 $22,045 $34,254 $17,977
Dividend Restrictions
The Bank's ability to pay dividends is restricted by certain
regulations. Under the current regulations, the Bank is not permitted to pay
cash dividends or repurchase any of its capital stock if such payment or
repurchase would cause its regulatory capital to be reduced below either the
amount of the liquidation account or the regulatory capital requirements
applicable to it. An institution that exceeds its fully phased in capital
requirement could, after prior notice, but without the approval of the OTS, make
capital distributions during a calendar year of up to 100% of its current net
income plus the amount that would reduce its "surplus capital ratio" (the excess
capital over its fully phased-in capital requirement) to less than one-half of
its surplus capital ratio at the beginning of the calendar year. Any additional
capital distributions would require prior regulatory approval. A savings
institution that does not meet its minimum regulatory capital requirements
cannot make any capital distributions without prior OTS approval. Because the
Bank is the primary source of working capital for the Company, the Company's
ability to pay dividends is therefore limited. Under the OTS directive discussed
above the Company has suspended the quarterly cash dividend on its common stock.
The Company paid cash dividends of $.12 per share during 2001 prior to the OTS
directive.
(22) Fair Value of Financial Instruments
Fair values for financial instruments were based on various assumptions
and estimates as of a specific point in time, represent liquidation values and
may vary significantly from amounts that will be realized in actual
transactions. In addition, certain financial instruments such as lease
contracts, and all non-financial instruments were excluded from the fair value
disclosure requirements. Therefore, the fair values presented below should not
be construed as the underlying value of the Company.
The following methods and assumptions were used to estimate the fair
value of selected financial instruments at December 31, 2001 and 2000:
Cash and due from other financial institutions: Current carrying
amounts reported in the statement of financial condition for cash and
short-term instruments are approximately estimated at fair value.
Trading securities: Current carrying amounts reported in the statement
of financial condition for trading securities are at fair value.
Investments and mortgage-backed securities: Fair values for investments
and mortgage-backed securities were based on current quoted market
prices.
50
Loans, excluding leases: For variable rate loans that reprice frequently and
have no significant credit risk, fair values are based on carrying values.
The estimated fair values for certain mortgage loans (e.g., one- to-
four-family residential) and other consumer loans are based on quoted market
prices of similar loans sold in conjunction with securitization
transactions. The fair value of non-accruing loans was estimated using
discounted cash flow analyses, with incremental discount rates which
consider credit risk and other relevant factors. The fair values for all
other loans were estimated by discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. The carrying amount of accrued interest approximates
its fair value.
Accrued interest receivable: Current carrying amounts reported in the
statement of financial condition for interest receivable approximate
estimated fair value.
Deposits: Fair values disclosed for deposits with no stated maturity
(checking, NOW, savings, and money market accounts) are, by definition,
equal to the amount payable on demand at December 31, 2001 and 2000 (i.e.,
current carrying amounts). Fair values for deposits with stated maturity
dates (time deposits) were estimated with a discounted cash flow calculation
that uses current borrowing rates for advances with comparable terms and
maturities. Current carrying amounts of escrow deposits approximate
estimated fair value.
Short-term borrowings: Current carrying amounts of Federal Home Loan Bank
advances, borrowings under repurchase agreements and other short-term
borrowings approximate estimated fair value.
Long-term and subordinated debt: Fair value of long-term borrowings is
estimated using a discounted cash flow calculation that uses current
borrowing rates for advances with comparable terms and maturities.
Accrued interest payable: Current carrying amounts reported in the statement
of financial condition approximate estimated fair value.
Commitments to extend credit and letters of credit: The majority of the
Company's commitments to extend credit and letters of credit carry current
market interest rates if converted to loans. Because commitments to extend
credit and letters of credit are generally unassignable by either the
Company or the borrower, they only have value to the Company and the
borrower. The estimated fair value approximates the recorded deferred fee
amounts.
The carrying amounts and fair values of the Company's financial instruments were
as follows:
- ----------------------------------------------------------------------------------------------------------
At December 31, 2001 2000
- ----------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-----------------------------------------
Financial assets:
Cash and due from other financial institutions $ 32,526 $ 32,526 $ 84,997 $ 84,997
Investments and mortgage-backed securities 250,001 249,848 247,106 245,391
Loans, excluding lease receivables(1) 492,957 505,076 486,936 492,562
Accrued interest receivable 4,551 4,551 5,625 5,625
Servicing rights 246 246 170 170
Financial liabilities:
Deposits $629,523 $626,406 $617,543 $617,486
Short-term borrowings 200 200 79,360 79,360
Long-term and subordinated debt 140,368 146,341 115,000 115,550
Accrued interest payable 3,526 3,526 5,819 5,819
(1) Includes loans held for sale
51
(23) Subsequent Event
TechBanc Sale
During the first quarter of 2002, the Company completed the
sale of its TechBanc assets to Comerica. Included in the sale were loans,
deposits and warrants of certain TechBanc's technology-based companies.
Capital Issuance
On February 11, 2002, the Company closed a private placement
offering of common stock to accredited investors of 1,153,330 common shares
priced at $7.50 a share, totaling $8.6 million, resulting in net proceeds of
approximately $8.3 million.
Office of Thrift Supervision Directive
On February 7, 2002 the OTS approved the Company's revised
Capital Enhancement Plan and agreed to extend the dates that the Bank must
comply with the targeted ratio of classified assets to capital. As revised, the
Bank's classified assets to capital ratio must not exceed 25% on June 30, 2002
and must not exceed 20% on September 30, 2002. At December 31, 2001, the Bank's
classified assets to capital ratio was approximately 36.0%. The Bank is working
aggressively to reduce the ratio and comply with the terms of the directive; but
there can be no assurance that the Bank will be in compliance with these
requirements on such dates. Failure to comply with such ratios could result in
the OTS taking further regulatory action.
(24) Condensed Financial Information of Progress Financial Corporation
(Parent Company Only)
Condensed Statements of Financial Condition
----------------------------------------------------------------------------------------------
At December 31, 2001 2000
----------------------------------------------------------------------------------------------
Assets:
Interest-earning deposits $ 1 $ 25
Investment in Bank 66,833 59,818
Investment in non-bank subsidiaries 6,595 14,689
Investment in unconsolidated entities 110 6
Investments available for sale 1,770 524
Loans and advances to subsidiaries 296 285
Other assets 684 199
------- -------
Total assets $76,289 $75,546
======= =======
Liabilities and shareholders' equity:
Liabilities:
Subordinated debt $ 3,000 $ 3,000
Employee Stock Ownership Plan note payable 1,475 --
Accounts payable to subsidiaries 417 943
Other liabilities 538 1,211
------- -------
Total liabilities 5,430 5,154
Corporation-obligated mandatorily redeemable capital securities of
subsidiary trust holding solely junior subordinated debentures of
the Corporation 20,260 20,232
Shareholders' equity:
Serial preferred stock -- --
Common stock 5,818 5,814
Treasury stock (628) (1,245)
Unearned Employee Stock Ownership Plan shares (1,448) --
Unearned compensation--restricted stock awards (107) (858)
Capital surplus 44,029 44,400
Retained earnings 3,620 3,848
Net accumulated other comprehensive income (loss) (685) (1,799)
------- -------
Total shareholders' equity 50,599 50,160
------- -------
Total liabilities, Corporation-obligated mandatorily
redeemable capital securities and shareholders' equity $76,289 $75,546
======= =======
52
Condensed Statements of Operations
For the years ended December 31, 2001 2000 1999
--------------------------------------------------------------------------------------------------
Dividends from equity investment $ $ -- $ 1
Management fees from subsidiaries 346 1,055 282
Investment advisory fees 24 24 52
Equity in undistributed income of subsidiaries 2,719 7,719 8,447
Equity (loss) in unconsolidated entities 19 -- (112)
Loss on sale of investments available for sale -- -- (23)
Miscellaneous income 80 -- --
Interest income 23 24 11
------- ------- -------
Total income 3,211 8,822 8,658
------- ------- -------
Interest expense 306 254 266
Professional services 143 99 82
Management fee to Bank 955 1,854 927
Capital securities expense 2,278 1,907 1,595
Miscellaneous expense 88 147 1,159
------- ------- -------
Total expense 3,770 4,261 4,029
------- ------- -------
Income (loss) from continuing operations before income taxes (559) 4,561 5,427
Income tax benefit (1,103) (1,058) (1,244)
------- ------- -------
Income from continuing operations 544 5,619 5,927
Income from discontinued operations (net of tax of $--, $189 and $53) -- 1,680 744
------- ------- -------
Net income $ 544 $ 7,299 $ 6,671
======= ======= =======
Condensed Statements of Cash Flows
For the years ended December 31, 2001 2000 1999
-----------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Income from continuing operations $ 544 $5,619 $ 5,927
Add(deduct) items not affecting cash flows from continuing operations:
Equity in income of subsidiaries (2,71) (7,719) (8,447)
(Equity) loss in unconsolidated entities (19) -- 112
Loss on sale of investments available for sale -- -- 23
Amortization 62 69 42
Net (increase) decrease in accounts receivable and other assets (402) 4,299 3,242
Net increase (decrease) in accounts payable and other liabilities (918) (5,211) 6,619
------ ------ -------
Net cashflows provided by (used in) continuing operations (3,45) (2,943) 7,518
Net cash flows provided by discontinued operations -- 2,776 244
------ ------ -------
Net cash flows provided by (used in) operating activities (3,45) (167) 7,762
------ ------ -------
Cash flows from investment activities:
Capital contributions and additional investment in subsidiaries (3,80) (5,885) (6,726)
Dividends and cash distributions from subsidiaries 8,712 2,601 3,620
Investments in unconsolidated entities (93) -- (973)
Cash Distributions from unconsolidated entities 8 -- --
Proceeds from sales of investments available for sale 524 1,107 120
Purchases of investments available for sale (1,77) (524) (1,107)
Purchase of Company owned life insurance (125) (125) (125)
------ ------ -------
Net cash flows used in investment activities 3,456 (2,826) (5,191)
------ ------ -------
Cash flows from financing activities:
Proceeds from issuance of ESOP debt 1,500 -- --
Repayment of ESOP debt (25) (74) (53)
Purchase of treasury stock (1,10) (2,165) (2,661)
Retirement of warrants -- -- (331)
Net proceeds from stock offering and exercise of warrants -- -- 1,350
Net proceeds from issuance of common stock under employee benefit plans 279 296 282
Dividends paid (677) (1,235) (962)
Proceeds from issuance of capital securities -- 6,000 --
------ ------ -------
Net cash flows provided by (used in) financing activities (28) 2,822 (2,375)
------ ------ -------
Net increase (decrease) in cash and cash equivalents (24) (171) 196
Cash and cash equivalents:
Beginning of year 25 196 --
------ ------ -------
End of year $ 1 $ 25 $ 196
====== ====== =======
These statements should be read in conjunction with the other notes to the
consolidated financial statements.
53
[Graphic Appears Here]
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
The accompanying consolidated financial statements and related notes of
the Corporation were prepared by management in conformity with generally
accepted accounting principles, and include amounts that are based on
management's best estimates and judgments. Management is responsible for the
integrity and fair presentation of these financial statements. Management has in
place an internal accounting control system designed to provide reasonable
assurance that assets are safeguarded and to ensure transactions are executed,
reported and recorded in accordance with management's intentions and
authorizations.
The Audit Committees of the Board of Directors, composed solely of
directors who are not employees of the Corporation or its subsidiaries, meets
periodically with management and Pricewaterhouse Coopers LLC; the internal
auditors and external auditors to determine that each is properly fulfilling its
responsibilities. The Corporation's consolidated financial statements have been
audited by Pricewaterhouse Coopers LLC, independent certified public
accountants. Its Report of Independent Accountants, which is based on an audit
made in accordance with generally accepted auditing standards, expresses an
opinion as to the fair presentation of the consolidated financial statements. In
performing its audit,
Pricewaterhouse Coopers LLC considers the Corporation's internal control
structure to the extent it deems necessary in order to issue its opinion on the
consolidated financial statements.
/s/ W. Kirk Wycoff
---------------------------
W. Kirk Wycoff
Chairman, President and
Chief Executive Officer
/s/ Michael B. High
---------------------------
Michael B. High
Chief Operating Officer and
Chief Financial Officer
54
[Graphic Appears Here]
Report of Independent Accountants
To the Shareholders and Board of Directors
of Progress Financial Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholders' equity
and cash flows present fairly, in all material respects, the financial position
of Progress Financial Corporation and its subsidiaries at December 31, 2001 and
December 31, 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
January 22, 2002
Philadelphia, Pennsylvania
55
[Graphic Appears Here]
January 4, 2002
Board of Directors
Progress Bank
4 Sentry Parkway
Suite 200
Blue Bell, PA 19422
Gentlemen:
Progress Bank and its wholly owned subsidiaries (PB) are responsible for the
preparation, integrity and fair presentation of its financial statements as of
December 31, 2001 and the year then ended. The financial statements have been
prepared on a comprehensive basis of accounting defined in the Federal Financial
Institutions Examination Council (FFIEC) Consolidated Condition of Income (Call
Reports) and, as such, include amounts, some of which are based on judgments and
estimates of management.
Management is responsible for establishing and maintaining an effective internal
control structure over financial reporting. The system contains monitoring
mechanisms, and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control system
can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of an
internal control system may vary over time.
Management assessed its internal control structure over financial reporting as
of December 31, 2001. This assessment was based on criteria for effective
internal control over financial reporting described in "Internal Control -
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management believes PB maintained
an effective internal control structure over financial reporting of December 31,
2001.
Management is also responsible for compliance with the federal and state laws
and regulations concerning dividend restrictions and federal laws and
regulations concerning loans to insiders designated by the FDIC as safety and
soundness laws and regulations.
Management assessed its compliance with the designated laws and regulations
relating to safety and soundness. Based on this assessment, management believes
that PB complied, in all significant respects, with designated laws and
regulations relating to safety and soundness for the year ended December 31,
2001.
/s/ W. Kirk Wycoff
----------------------------------------
W. Kirk Wycoff,
Chief Executive Officer
/s/ Michael B. High
----------------------------------------
Michael B. High, Chief Operating Officer
and Chief Financial Officer
56
[Graphic Appears Here]
Report of Independent Accountants
To the Board of Directors
of Progress Bank
We have examined management's assertion, included in the accompanying letter to
be sent to the federal Deposit Insurance Corporation (FDIC), that Progress Bank
and its wholly owned subsidiaries maintained effective internal control over
financial reporting as of December 31, 2001, based on criteria established in
"Internal Control - Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Progress Bank's management is
responsible for maintaining effective internal control over financial reporting.
Our responsibility is to express an opinion on management's assertion based on
our examination.
Our examination was conducted in accordance with attestation standards
established by the American Institute of Certified Accountants and, accordingly,
included obtaining an understanding of internal control over financial
reporting, testing, and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our examination provides a
reasonable basis for our opinion.
Because of inherent limitations in any internal control, misstatements due to
error or fraud may occur and not be detected. Also, projections of any
evaluation of internal control over financial reporting to future periods are
subject to the risk that the internal control may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assertion that Progress Bank and its wholly owned
subsidiaries maintained effective internal control over financial reporting as
of December 31, 2001 is fairly stated, in all material respects, based upon
criteria established in "Internal Control -- Integrated Framework" issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
PricewaterhouseCoopers LLP
January 22, 2002
Philadelphia, Pennsylvania
57
Selected Quarterly Consolidated Financial Data (Unaudited)
The following table represents quarterly financial data for the period
indicated. In the opinion of management, this information reflects all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the results of operations for the periods indicated.
Reclassifications have been made to certain previously reported amounts to
conform to the 2001 classifications. Prior period per share information has been
restated to reflect the 5% stock dividend to shareholders on August 31, 2000.
Dec. 31, Sept. 30, Jun. 30, Mar. 31, Dec. 31, Sept. 30, Jun. 30, Mar. 31,
2001 2001 2001 2000 2000 2000 2000 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income $14,451 $16,330 $16,906 $17,298 $18,316 $17,170 $16,331 $15,211
Interest expense 7,046 8,235 8,912 9,179 10,069 9,091 8,400 7,615
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 7,405 8,095 7,994 8,119 8,247 8,079 7,931 7,596
Provision for loan and lease losses 972 1,543 3,554 1,047 1,666 517 1,175 1,058
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan
and lease losses 6,433 6,552 4,440 7,072 6,581 7,562 6,756 6,538
Non-interest income 5,516 4,252 3,285 3,058 6,545 4,193 3,924 4,880
Non-interest expense 10,810 9,408 9,825 9,520 10,793 9,177 9,142 9,194
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before
income taxes and extraordinary loss 1,139 1,396 (2,100) 610 2,333 2,578 1,538 2,224
Income tax expense 385 463 (731) 185 907 841 529 739
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before
extraordinary loss 754 933 (1,369) 425 1,426 1,737 1,009 1,485
Gain on sale of discontinued operations,
net of tax -- -- -- -- -- 6 1,513 --
Income from discontinued operations,
net of tax -- -- -- -- -- 9 61 53
- ------------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss 754 933 (1,369) 425 1,426 1,752 2,583 1,538
Extraordinary loss on extinguishment of
debt, net of tax (199) -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 555 $ 933 (1,369) $ 425 $ 1,426 $ 1,752 $ 2,583 $ 1,538
====================================================================================================================================
Basic income, per common share, from
continuing operations before
extraordinary loss $ .13 $ .17 $ (.24) $ .07 $ .25 $ .30 $ .18 $ .25
Diluted income, per common share, from
continuing operations before
extraordinary loss .13 .17 (.24) .07 .24 .29 .17 .25
Basic net income per common share .10 .17 (.24) .07 .25 .30 .45 .26
Diluted net income per common share .10 .17 (.24) .07 .24 .29 .43 .26
Dividends per share -- -- .06 .06 .06 .05 .05 .05
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained in the section titled "Information with Respect to
Nominees for Director and Directors Whose Terms Continue" in the Company's
definitive Proxy Statement for the 2002 Annual Meeting to be held April 23, 2002
(the "Proxy Statement").
Item 11. Executive Compensation
The information appearing in the section titled "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information appearing in the section titled "Beneficial
Ownership of Common Stock by Certain Beneficial Owners and Management" and
"Election of Directors" (with respect to security ownership by Directors) in the
Proxy Statement is incorporated herein by reference.
58
Item 13. Certain Relationships and Related Transactions
The information appearing in the section titled "Certain
Transactions" in the Proxy Statement is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
a. Financial data schedules are not required under the related instructions of
the Securities and Exchange Commission or are inapplicable and, therefore, have
been omitted.
b. The following exhibits are incorporated by reference herein or are filed as
part of this Annual Report.
No. Exhibits
- --- --------
*3.1 Certificate of Incorporation (Exhibit 3.1 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1987, filed with the
Securities and Exchange Commission (the "SEC"))
*3.2 By-Laws (Exhibit 3.2 to the Company's Registration Statement No. 33-3685
on Form S-4, filed with the SEC on March 3, 1986)
*3.3 Certificate of Amendment of Certificate of Incorporation dated May 13,
1998. (Exhibit 3.3 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 and filed with the SEC on March 29, 1999)
*4.1 Amended and Restated Declaration of Trust relating to Progress Capital
Trust I, dated as of June 3, 1997, between Progress Financial Corporation
and the trustees named therein. (Exhibit 4.4 to the Company's Registration
Statement on Form S-4, filed with the SEC on October 22, 1997)
*4.2 Indenture, dated as of June 3, 1997, between Progress Financial
Corporation and The Bank of New York, as trustee, relating to Junior
Subordinated Deferrable Interest Debentures due 2027 of Progress Financial
Corporation. (Exhibit 4.1 to the Company's Registration Statement on Form
S-4, filed with the SEC on October 22, 1997)
*4.3 Series B Capital Securities Guarantee Agreement, dated as of December 11,
1997, relating to the Capital Securities of Progress Capital Trust I.
(Exhibit 4.6 to the Company's Registration Statement on Form S-4, filed
with the SEC on October 22, 1997)
*10.1 1993 Stock Incentive Plan as amended in 1999. (Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1999,
filed with the SEC on March 29, 2000)
*10.2 1993 Directors' Stock Option Plan as amended in 1997. (Appendix B to the
Company's Definitive Proxy on Form DEF 14A, filed with the SEC on April 7,
1997)
*10.3 Employment Agreement between Progress Financial Corporation, Progress Bank
and W. Kirk Wycoff dated March 1, 1997. (Exhibit 10.5 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, filed
with the SEC on March 29, 1999)
*10.4 Change in Control and Termination Agreement between Progress Financial
Corporation, Progress Bank and Michael B. High dated October 2, 1998.
(Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, filed with the SEC on March 29, 1999)
*10.5 Change in Control and Termination Agreement between Progress Financial
Corporation, Progress Bank and H. Wayne Griest dated November 17, 1998.
(Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, filed with the SEC on March 29, 1999)
59
*10.6 Change in Control and Termination Agreement between Progress Financial
Corporation, Progress Bank and Eric J. Morgan dated October 2, 1998.
(Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, filed with the SEC on March 29, 1999)
*10.7 Employment Agreement between Progress Bank and Joseph R. Klinger dated
January 1, 2000. (Exhibit 10.7 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000, filed with the SEC on March 22,
2001)
*10.8 Restricted Stock Award Plan dated February 17, 1999. (Exhibit 4 on the
Company's Registration Statement on Form S-8, File Number 333-72543 filed
with the SEC on February 18, 1999)
*10.9 2000 Stock Incentive Plan. (Exhibit 99.1 to the Company's Definitive Proxy
on Form DEF 14A, filed with the SEC on March 24, 2000)
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants for Progress Financial Corporation
99 Audited financial statements for Ben Franklin/Progress Capital Fund, L.P.
* Incorporated by reference.
c. Reports on Form 8-K filed for the quarter ended December 31, 2001:
1. On October 24, 2001, the Company filed a Current Report under Item 5
announcing its Third Quarter 2001 earnings and the distribution of an
earnings package to analysts.
2. On November 26, 2001, the Company filed a Current Report for November
21, 2001 under Item 5 announcing that it had signed a definitive
agreement with Comerica to sell a significant portion of the assets of
the Bank's TechBanc division.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto being duly authorized.
Progress Financial Corporation
March 19, 2002 BY: /s/ W. Kirk Wycoff
- ----------------------- ---------------------------
Date W. Kirk Wycoff, Chairman, President and
Chief Executive Officer
Pursuant to the Requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
/s/ W. Kirk Wycoff March 19, 2002
- ---------------------------------------- -----------------
W. Kirk Wycoff, Chairman, President Date
and Chief Executive Officer
/s/ John E. F. Corson March 19, 2002
- ---------------------------------------- -----------------
John E. Flynn Corson, Director Date
/s/ William O. Daggett, Jr. March 19, 2002
- ---------------------------------------- -----------------
William O. Daggett, Jr., Director Date
/s/ G. Daniel Jones March 19, 2002
- ---------------------------------------- -----------------
G. Daniel Jones, Director Date
/s/ Joseph R. Klinger March 19, 2002
- ---------------------------------------- -----------------
Joseph R. Klinger, Director Date
/s/ Paul M. LaNoce March 19, 2002
- ---------------------------------------- -----------------
Paul M. LaNoce, Director Date
/s/ A. John May March 19, 2002
- ---------------------------------------- -----------------
A. John May, III, Director Date
/s/ William L. Mueller March 19, 2002
- ---------------------------------------- -----------------
William L. Mueller, Director Date
/s/ Kevin J. Silverang March 19, 2002
- ---------------------------------------- -----------------
Kevin J. Silverang, Director Date
/s/ Charles J. Tornetta March 19, 2002
- ---------------------------------------- -----------------
Charles J. Tornetta, Director Date
/s/ Stephen T. Zarrilli March 19, 2002
- ---------------------------------------- -----------------
Stephen T. Zarrilli, Director Date
/s/ Michael B. High March 19, 2002
- ---------------------------------------- -----------------
Michael B. High, Chief Financial Officer Date
and Chief Operating Officer
61