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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, 2002
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
-----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
The aggregate market value of the voting stock, held by non-affiliates of the
Registrant as a group, was $60,480,310 as of June 28, 2002, based upon the
closing price of $9.74 per share of the Registrant's common stock on June 28,
2002 as reported by The Nasdaq Stock Market(SM).
As of March 7, 2003, there were 6,612,321 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 2003 Annual Meeting
of Shareholders are incorporated into Part I, Item 5 and 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................................................................................ 11
Item 3. Legal Proceedings......................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders....................................... 11
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................. 11
Item 6. Selected Consolidated Financial Data...................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................. 13
Item 7A. Quantitative and Qualitative Disclosure about Market Risk................................. 28
Item 8. Financial Statements and Supplementary Data............................................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................................. 63
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 63
Item 11. Executive Compensation.................................................................... 63
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 63
Item 13. Certain Relationships and Related Transactions............................................ 63
Item 14. Controls and Procedures................................................................... 63
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 64
Signatures................................................................................ 66
Certifications............................................................................ 67
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 continues to focus on its corporate simplification
program, which commenced in early 2000. As part of this strategy, the Company
reduced the number of its businesses by the end of 2001, including venture fund
management and real estate development. The Bank sold its technology lending
group to Comerica Bank--California ("Comerica") in January 2002.
Banking. The Bank has nineteen banking offices in southeastern Pennsylvania 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, and two full-service
banking offices in Philadelphia County, and one full-service banking office in
Lambertville, Hunterdon County, New Jersey. Banking hours at select offices were
expanded in 2002 to include Saturday and Sunday and in 2003 to include some
holidays to give clients increased convenience of banking. 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 sold a
significant portion of loans in the technology sector in January 2002. The
Company also de-emphasized the equipment leasing operation and exited
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 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 products the Bank offers and
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 concentrated effort to
offer high net worth individuals enhanced private banking products and services
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working closely with Progress Financial Resources, Inc., a subsidiary of the
Company, to identify and meet the specialized investment and wealth planning
needs of this affluent market.
The Bank's commercial business lending portfolio was $84.0 million at
December 31, 2002. Most commercial business loan customers are small- to
middle-market businesses located in the Bank's primary market area of Bucks,
Chester, Delaware and Montgomery Counties. Generally, commercial business loans
are between $100,000 and $2.5 million; however, the largest commercial business
loan at December 31, 2002 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. At December 31, 2002, Government Guaranteed Lending had $12.1
million ($30.0 million gross of $17.9 million in participations sold) in
commercial business loans and $3.6 million ($9.8 million gross of $6.2 million
in participations sold) in commercial real estate loans.
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 had 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 sold
the technology lending group to Comerica in January 2002. Approximately 25
commercial business loan relationships with balances totaling $23.3 million were
sold to Comerica. The sale also included one loan relationship amounting to $2.3
million which was classified as commercial real estate loan. Also included in
the sale were related customer deposits and warrants to purchase common stock of
these companies. At December 31, 2002, the Bank's TechBanc loan portfolio
consisted of approximately 12 commercial business loan relationships with an
aggregate balance of $3.5 million outstanding (of which $2.6 million are
impaired loans); the largest loan relationship had an outstanding balance of
$1.2 million.
In addition to providing financing to pre-profit companies, 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, 2002, the Company held
warrants to purchase common stock of 25 companies that were customers of
TechBanc. Warrants to purchase common stock of an additional 14 companies were
included in the 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, 2002 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. Under the agreement of sale with Comerica, if
any of the warrants sold are exercised, Comerica will pay the Company 20% of the
net warrant value within thirty days ("initial payment"). Twelve months after
the initial payment is made, Comerica will pay the Company an additional 20% of
the net warrant value minus any losses. During 2002, Comerica paid the Company
an initial payment of $20,000 under this agreement. The Company entered into a
warrant participation agreement with now-former employees of TechBanc
("participants") under which the Company will pay the participants 10% of the
net proceeds (net cash received on the exercise of client warrants less 25% of
the net charge-offs on the TechBanc loan portfolio for the previous year)
received by December 31, 2003 on selected exercised warrants. During 2002, the
Company paid $117,000 under this warrant participation agreement.
The following is a brief description of the companies in which the
Company held warrants at December 31, 2002 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 62,500 shares of Axeda common stock
with an exercise price of $3.56 per share and an expiration date of
July 2005. Axeda went public 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 $.80 per
share on December 31, 2002.
4
Orthovita,Inc. ("VITA"), located in Malvern, Pennsylvania, is a
proprietary technologies company which develops synthetic, biologically
active, tissue engineering products for the restoration of the human
skeleton. The Company holds warrants to purchase 20,000 shares of VITA
common stock with an exercise prices ranging from $4.25 to $6.00 per
share and expiration dates ranging from November 2004 to April 2008.
VITA went public at an initial offering price of $10.50 per share of
common stock on June 25, 1998. VITA closed at $4.35 per share on
December 31, 2002.
Upon exercise of the warrant, the Company would generally be
prohibited, under 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, 2002, the Bank's commercial real estate loan portfolio
consisted of approximately 390 loans with an aggregate principal balance of
approximately $199.7 million which included $3.6 million in Government
Guaranteed Lending loans. The Bank's largest commercial real estate loan had an
outstanding balance of $5.6 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, 2002, 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, with offices in Blue Bell, Pennsylvania, and 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, 2002, the Company's construction loan portfolio consisted
of approximately 50 relationships with an aggregate principal balance of
approximately $87.7 million and the Company's largest construction loan had an
outstanding balance of $11.0 million, of which $5.3 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
5
Company may be required to advance funds beyond the amount originally committed
to permit completion of the development. If the estimate of value proves to be
inaccurate, the Company may be confronted, at or prior to the maturity of the
loan, with a project having a value which is insufficient to assure full
repayment, in which case the Company would have to rely upon the borrower's
financial ability.
The Company generally attempts to address the additional risks
associated with construction lending by, among other things, limiting lending
primarily to 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, 2002,
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) single family residential properties.
Prior to making a commitment to fund a construction loan, the Company requires
an appraisal of the property by independent appraisers approved by the Board of
Directors.
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.
Single Family Residential Real Estate. The Bank, realizing the
extremely competitive nature of the residential lending arena, has aligned with
a mortgage broker to efficiently offer our customers residential loan products.
The mortgage broker is responsible for all aspects of the residential lending
function, however the Bank monitors this process and any loan purchased meets
the industry standard established by Fannie Mae ("FNMA"). At December 31, 2002
the Bank's single family residential real estate loan portfolio consisted of
approximately 190 loans with an aggregate outstanding balance of $26.9 million.
The Bank provides residential mortgage servicing on an additional 40 loans with
an aggregate outstanding balance of $2.7 million for other financial
institutions.
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, 2002 the Bank's
consumer loan portfolio consisted of approximately 1,900 loans with an aggregate
outstanding balance of $50.1 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 ceased originating equipment leases in 2002. At
December 31, 2002, the Company's lease financing portfolio consisted of
approximately 1,907 leases with an outstanding aggregate balance of $17.4
million. This was a decrease of $20.1 million from the outstanding balance at
December 31, 2001 primarily due to the leasing operation being de-emphasized as
the result of the corporate simplification initiative. In December 2000, the
Company sold its Maryland-based leasing division resulting in the sale of $31.0
million of lease financing receivables.
6
Equipment lease financing was provided through the Bank's subsidiary,
Progress Leasing Company ("PLC") located in Blue Bell, Pennsylvania. The Company
provided leasing arrangements for essential-use equipment primarily to clients
within the market area. The Company provided 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. The aggregate residual value of the Company's leasing portfolio was
$664,000 at December 31, 2002.
Private Equity Fund Management. Progress Capital Management, Inc. ("PCM"), a
subsidiary of the Company, manages Ben Franklin/Progress Capital Fund, L.P. (the
"Ben Franklin Fund") and provides consulting services to NewSpring Ventures,
L.P. ("NewSpring"). PCM earned management fees from these funds. PCM is exiting
the venture 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, the Ben Franklin Fund 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 currently distributing its profits to limited
partners. At December 31, 2002 the Company's investment in the Ben
Franklin Fund was $988,000.
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% limited
partnership interest in NewSpring during the first quarter of 2002
which was required as part of the sale at December 31, 2001. At
December 31, 2002 the Company's investment in NewSpring was $9,000.
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. Beginning the second quarter
of 2002, new business generated through the Insurance/Wealth Management segment
has been through an agency arrangement with AXA Financial ("AXA") where the
sales personnel are dual employees of PFR and AXA.
Other Activities. Progress Capital, Inc. ("PCI"), a subsidiary of the Company,
was formed in 1996 and is the corporate general partner of the Ben Franklin Fund
and hold's the Company's equity interest in the Ben Franklin Fund. PCI holds the
equity interest in NewSpring. PCI also holds several investments in other
privately held companies amounting to $1.6 million at December 31, 2002.
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 focus on its 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
7
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.
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 (a) Management (b) Management (c) Segments Corporate Total
- ------------------------------------------------------------------------------------------------------------------------------
Assets at:
December 31, 2002 $986,455 $18,262 $ 44 $ 521 $ 595 $ 11,967 $1,017,844
December 31, 2001 803,588 37,351 10 678 1,175 8,578 851,380
Revenues for the year ended:
December 31, 2002 39,295 1,989 247 2,761 904 (2,967) 42,229
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
Income from continuing
operations for the year ended:
December 31, 2002 7,519 (472) 61 -- (710) (2,402) 3,996
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
(a) During the first quarter of 2002, management decided to stop originating
leases due to a change in business climate and subsequently significantly
reduced the staffing levels in the Equipment Leasing segment.
(b) At December 31, 2001, the Private Equity Fund Management segment exited the
venture fund management business.
(c) Beginning the second quarter of 2002, new business generated through the
Insurance/Wealth Management segment has been through an agency arrangement
with AXA where the sales personnel are dual employees of PFR and AXA.
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.
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
8
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 they 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 separate 10% of assets limitation.
The Company's financing leases may be considered operating leases under these
federal regulations and hence subject to the separate 10% limitation. At
December 31, 2002, 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, 2002, the Bank's loans-to-one-borrower
limit was approximately $12.6 million. The Bank was in compliance with this
limitation at December 31, 2002.
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 2002 averaged 1.75 cents per $100 of deposits
compared to an average 1.90 cents per $100 of deposits in 2001 and 2.07 cents
per $100 of deposits in 2000. 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 there under 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 2002. At December 31, 2002,
approximately 84% of the Bank's assets were invested in qualified thrift
investments, which were 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, 2002, the Bank's advances from the FHLB
amounted to $135.5 million.
As a member, the Bank is required to purchase and maintain stock in the
FHLB in an amount equal to the greater of 5% of its FHLB advances plus .5% of
its unused FHLB borrowing capacity. At December 31, 2002, the Bank had $8.4
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, 2002, the Bank was in compliance with this regulation.
9
Sarbanes-Oxley Act of 2002
On July 30, 2002, President George W. Bush signed into law the
Sarbanes-Oxley Act of 2002, which generally establishes a comprehensive
framework to modernize and reform the oversight of public company auditing,
improve the quality and transparency of financial reporting by those companies
and strengthen the independence of auditors. The new legislation's more
significant reforms are noted below.
o The new legislation creates a public company accounting oversight board
which is empowered to set auditing, quality control and ethics
standards, to inspect registered public accounting firms, to conduct
investigations and to take disciplinary actions, subject to Securities
Exchange Commission ("SEC") oversight and review. The new board will be
funded by mandatory fees paid by all public companies. The new
legislation also improves the Financial Accounting Standards Board,
giving it full financial independence from the accounting industry.
o The new legislation strengthens auditor independence from corporate
management by, among other things, limiting the scope of consulting
services that auditors can offer their public company audit clients.
o The new legislation heightens the responsibility of public company
directors and senior managers for the quality of the financial
reporting and disclosure made by their companies. Among other things,
the new legislation provides for a strong public company audit
committee that will be directly responsible for the appointment,
compensation and oversight of the work of the public company auditors.
o The new legislation contains a number of provisions to deter
wrongdoing. Chief executive officers ("CEO") and chief financial
officers ("CFO") will have to certify that company financial statements
fairly present the company's financial condition. If a misleading
financial statement later resulted in a restatement, the CEO and CFO
must forfeit and return to the company any bonus, stock or stock option
compensation received in the twelve months following the misleading
financial report. The new legislation also prohibits any company
officer or director from attempting to mislead or coerce an auditor.
Among other reforms, the new legislation empowers the SEC to bar
certain persons from serving as officers or directors of a public
company; prohibits insider trades during pension funds "blackout
periods;" directs the SEC to adopt rules requiring attorneys to report
securities law violations; and requires that civil penalties imposed by
the SEC go into a disgorgement fund to benefit harmed investors.
o The new legislation imposes a range of new corporate disclosure
requirements. Among other things, the new legislation requires public
companies to report all off-balance-sheet transactions and conflicts,
as well as to present any pro forma disclosures in a way that is not
misleading and in accordance with requirements to be established by the
SEC. The new legislation also accelerated the required reporting of
insider transactions, which now generally must be reported by the end
of the second business day following a covered transaction; requires
that annual reports filed with the SEC include a statement by
management asserting that it is responsible for creating and
maintaining adequate internal controls and assessing the effectiveness
of those controls; and requires companies to disclose whether or not
they have adopted an ethics code for senior financial officers, and, if
not, why not, and whether the audit committee includes at least one
"financial expert," a term which is to be defined by the SEC in
accordance with specified requirements. The new legislation also
requires the SEC, based on certain enumerated factors, to regularly and
systematically review corporate filings.
o The new legislation contains provisions which generally seek to limit
and expose to public view possible conflicts of interest affecting
securities analysts.
o Finally, the new legislation imposes a range of new criminal penalties
for fraud and other wrongful acts, as well as extends the period during
which certain types of lawsuits can be brought against the company or
its insiders.
Employees
As of December 31, 2002, the Company had a total of 268 full-time
equivalent employees. Employment at the Company's individual subsidiaries was as
follows: the Bank and its subsidiaries PLC and PRA had 242 full-time equivalent
employees; PFR had 24 full-time equivalent employees and KMR had 2 full-time
equivalent employees.
10
Available Information
The Company makes available free of charge on its website, its annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and all amendments to those reports as soon as reasonably practicable after
such material is electronically filed with the Commission. The Company's website
address is www.progressbank.com.
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 banking 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; seven
of which are owned and twelve are leased. The Bank also conducts business from
its banking office in Lambertville, NJ; which is owned. 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.
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 a result of the
directors' breaches of fiduciary duty, awarding the plaintiff the costs and
disbursements of the actions, including expenses of the lawsuit and granting
such other and further relief as the Court may deem just and proper. The Company
believes that this action is without merit and is defending the action
vigorously. On December 7, 2001, the Company filed an Opening Brief and Motion
to Dismiss the Complaint, which the plaintiff filed an opposition to on January
25, 2002. On March 8, 2002, the Company filed a Reply Brief in support of its
motion to dismiss. Oral argument was held on April 24, 2002. The Company is
awaiting a ruling on its motion.
Item 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, 2002 the Company had
approximately 1,800 holders of record.
Payment of cash dividends is subject to regulatory restrictions as
described in Note 20 of Notes to Consolidated Financial Statements. The Company
paid cash dividends the last two quarters of 2002 totaling $.10 and for the
first two quarters of 2001 totaling $.12 per share. The following table sets
forth the high and low closing prices, trading volumes and cash dividends per
share paid for the periods described.
2002 2001
---------------------------------------------------- --------------------------------------------------
Low High Volume Dividends Low High Volume Dividends
---------------------------------------------------- --------------------------------------------------
First Quarter $7.44 $ 9.65 758,700 $-- $7.06 $9.63 1,057,900 $.06
Second Quarter 8.61 10.40 804,600 -- 6.88 8.40 819,500 .06
Third Quarter 7.46 10.15 703,539 .05 5.60 7.94 629,200 --
Fourth Quarter 9.90 11.61 546,392 .05 5.90 7.60 485,300 --
The Equity Compensation Plan information table in the section
"Executive Compensation" appearing in the Company's definitive proxy statement
for the 2003 Annual Meeting to held on April 22, 2003 (the "Proxy Statement") is
incorporated herein by reference.
11
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, 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Financial Condition
Investment and mortgage-backed securities:
Available for sale $ 359,290 $211,828 $205,166 $149,518 $164,368
Held to maturity 120,006 38,173 41,940 34,309 12,401
Loans and leases, net 459,350 495,025 535,712 497,738 394,246
Loans held for sale -- 25,587 -- -- 25,250
Real estate owned, net -- 1,533 1,750 66 --
Total assets 1,017,844 851,380 914,249 768,941 648,198
Deposits 691,538 629,523 617,543 521,439 408,162
Borrowings and subordinated debt 247,445 160,828 214,592 177,218 181,847
Shareholders' equity 66,729 50,599 50,160 47,809 41,554
Results of Operations
Interest income $53,235 $64,985 $67,028 $52,174 $45,329
Interest expense 26,325 35,650 37,082 27,027 24,043
Net interest income 26,910 29,335 29,946 25,147 21,286
Provision for loan and lease losses 3,814 7,116 4,416 3,548 959
Net interest income after provision for loan and lease 23,096 22,219 25,530 21,599 20,327
losses
Non-interest income 15,319 15,810 19,542 17,587 7,645
Non-interest expense 32,150 37,285 36,399 30,053 20,241
Income from continuing operations before income taxes
and cumulative effect of accounting change 6,265 744 8,673 9,133 7,731
Tax expense 2,269 200 3,016 3,101 2,816
Income from continuing operations before cumulative
effect of accounting change 3,996 544 5,657 6,032 4,915
Gain on sale of discontinued operations, net of tax -- -- 1,519 -- --
Income from discontinued operations, net of tax -- -- 123 639 111
Income before cumulative effect of accounting change 3,996 544 7,299 6,671 5,026
Cumulative effect of accounting change, net of tax
benefit -- -- -- -- (46)
Net income 3,996 544 7,299 6,671 4,980
Per Share Data
Basic income from continuing operations per common
share before cumulative effect of accounting change $ .60 $ .10 $ .98 $ 1.04 $ .92
Diluted income from continuing operations per common
share before cumulative effect of accounting change .59 .10 .95 .99 .84
Basic net income per common share .60 .10 1.26 1.15 .93
Diluted net income per common share .59 .10 1.22 1.10 .85
Dividends .10 .12 .21 .17 .12
Book value 9.85 9.11 8.82 8.26 7.45
Operating Data
Return on average assets .44% .06% .88% .98% .89%
Return on average shareholders' equity 6.38 1.04 15.16 15.47 13.78
Average shareholders' equity to average assets 6.93 5.82 5.78 6.33 6.42
Allowance for loan and lease losses to total loans and
leases 1.39 1.87 1.36 1.18 1.06
Non-performing assets as a percentage of total assets .54 1.28 .63 .75 .57
Interest rate spread 2.83 3.00 3.36 3.46 3.47
Net interest margin 3.23 3.52 3.92 3.99 4.02
Dividends declared as a percent of net income per share 16.95 120.00 17.21 15.45 14.12
Banking Office Data
Number of full service banking offices 20 20 16 14 11
12
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 five primary subsidiaries: Progress Bank (the "Bank"),
Progress Capital, Inc. ("PCI"), KMR Management, Inc. ("KMR"), 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 2002 data.
This report on Form 10-K release contains forward-looking statements
that involve risks and uncertainties that could cause actual results to differ
materially from estimates. When used in filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project", or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties
including changes in economic conditions in the Company's market area, changes
in policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
Critical Accounting Policies
Accounting policies involving significant judgments and assumptions by
management, which have, or could have, a material impact on the carrying value
of certain assets or comprehensive income, are considered critical accounting
policies. The Company recognizes the following as critical accounting policies:
Allowance for Loan and Lease Losses, Goodwill and Other Intangible Asset
Impairment, Stock-Based Compensation, and Unrealized Gains and Losses on Debt
Securities Held for Sale.
Allowance for Loan and Lease Losses: The Company maintains an allowance
for loan and lease losses at a level management believes is sufficient to
provide for known and probable losses in the loan and lease portfolios at the
Banking and Equipment Leasing segments. Risks within the loan and lease
portfolio are analyzed on a continuous basis by the Company's officers, external
independent loan and lease review consultants, and by the Bank's Board of
Directors at each board meeting. Significant estimates are made by management in
determining the allowance for loan and lease losses. Consideration is given to a
variety of factors in establishing these estimates including current and
anticipated economic conditions, diversification of the loan portfolio,
delinquency statistics, results of internal loan reviews, borrowers' perceived
financial and managerial strengths, the adequacy of underlying collateral, the
dependence on collateral, or the strength of the present value of future cash
flows and other relevant factors. Since the allowance for loan and lease losses
is dependent, to a great extent, on general and other conditions that may be
beyond the Company's control, it is at least reasonably possible that the
Company's estimates of the allowance for loan and lease losses could differ
materially in the near term. Although management utilizes its best judgment in
providing for loan and lease losses, there can be no assurance that the Company
will not have to increase its provision for loan and lease losses in the future
as a result of adverse market conditions, future increases in non-performing
loans and leases, or for other reasons. Any such increase could adversely affect
the Company's results of operations. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the
allowance for loan and lease losses and the carrying value of its other
non-performing assets. Such agencies may require the Company to recognize
additions to its allowance for losses based on their judgments of information
available to them at the time of their examination. The Company and the Bank
were most recently examined by the Office of Thrift Supervision ("OTS") as of
December 31, 2002.
Goodwill and Other Intangible Asset Impairment: Quoted market prices
are not typically available in evaluating the Company's goodwill and other
intangible assets; therefore, the Company estimates the fair value of its
goodwill and other intangible assets using the present value of estimated future
cash flows. The Company's best estimate of the present value of cash flows may
not necessarily equate to the market value of the underlying asset. Goodwill and
other intangible assets are carried by the Banking, Equipment Leasing and Other
segments.
13
Stock-Based Compensation: Under SFAS No. 123 "Accounting for
Stock-Based Compensation" ("FAS 123"), companies had a choice whether to adopt
the fair value based method of accounting for stock-based compensation or remain
with the intrinsic value based method prescribed under APB Option No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") but provide pro-forma
disclosures as if the fair value based method was applied. The Company chose the
intrinsic value based method under APB 25 and provides the pro-forma disclosures
required under FAS 123. In preparing the pro-forma disclosures, the Company
estimates the fair value of employee stock options using a pricing model that
takes into account the exercise price and expected life of the options, the
current price of the underlying stock and its expected volatility, the expected
dividends on the stock and the current risk-free interest rate for the expected
life of the option. The Company's best estimate of the fair value of a stock
option is based on expectations derived from historical experience and may not
necessarily equate to its market value when fully vested. Increasing numbers of
constituents are advocating that companies voluntarily adopt the fair value
based method under FAS 123. If the Company chose to adopt FAS 123, additional
expense, net of tax benefits, of approximately $252,000 would be recognized for
the Year 2002.
Unrealized Gains and Losses on Debt Securities Held for Sale: The
Company receives estimated fair values of debt securities from an independent
valuation service and brokers. In developing these fair values, the valuation
service and brokers use estimates of cash flows based on historical performance
of similar instruments in similar rate environments. Based on experience,
management is aware that estimated fair values of debt securities tend to vary
among brokers and other valuation services. In such instances, management will
use the average of multiple price indications. Debt securities held for sale are
carried at the Banking segment and are mostly comprised of mortgage-backed
securities.
Results of Operations--2002 Versus 2001
The Company reported net income of $4.0 million for the year ended
December 31, 2002, in comparison with $544,000 for the year ended December 31,
2001. Basic net income per common share was $.60 for 2002 and $.10 for 2001.
Fully diluted net income per common share was $.59 for 2002 and $.10 for 2001.
Income from continuing operations was $4.0 million for the year ended December
31, 2002, in comparison with $544,000 for the year 2001. Return on average
shareholders' equity was 6.38% and return on average assets was .44% for the
year ended December 31, 2002. For 2001, return on average shareholders' equity
was 1.04% and return on average assets was .06%.
Net Interest Income
Net interest income on tax-equivalent basis was $27.5 million for 2002,
a decrease of $2.3 million compared to $29.8 million for 2001. This decrease was
primarily due to the reduction in the net interest margin. There was a slight
increase in the positive variance between average interest-earning assets and
average interest-bearing liabilities of $3.9 million which resulted primarily
from higher volumes in mortgage-backed securities partially offset by decreased
commercial business loan volume as a result of the sale and payoffs of TechBanc
loans. The net interest margin was 3.23% for 2002 compared to 3.52% for 2001.
The margin has been negatively impacted by the decline in interest rates, the
sale and payoffs of TechBanc loans and runoff of the lease financing portfolio.
The Company reclassified its capital securities to debt and the related expense
from non-interest expense to interest on borrowings. This reclassification
reduced the net interest margin by 27 basis points for the years ended December
31, 2002 and 2001.
Provision for Loan and Lease Losses
The provision for loan and lease losses amounted to $3.8 million in
2002 compared to $7.1 million in 2001. The higher provision during 2001
reflected the reserve additions to address credit and economic concerns which
have now been reduced as a result of the sale of TechBanc loans to Comerica in
January 2002, the pay-off of higher risk credits and the resulting reduction in
the Company's classified assets. The ratio of the allowance for loan and lease
losses to total non-performing loans and leases was 118.65% and 106.28% at
December 31, 2002 and 2001, respectively.
Non-interest Income
Non-interest income for 2002 was $15.3 million compared to $15.8
million for 2001. Client warrant income was $1.9 million for 2002 primarily from
the sale of client warrants compared to losses of $1.9 million from client
warrants for 2001 due to the permanent impairment of equity securities received
from warrants. Fee income for 2002 decreased $3.6 million primarily due to a
reduction in the Company's business activities related to PCM, KMR and PLC
partially offset by an increase in service charges on deposits. A net gain on
sale of real estate of $1.6 million was recognized during 2002 resulting from
the sale of land and commercial real estate owned. Gain on sale of securities
for 2002 was $655,000, a decrease of $2.1 million compared to $2.8 million for
2001. Equity in unconsolidated entities was $88,000 for 2002 compared to a loss
of $634,000 for 2001.
14
During 2002, the Company recognized income from client warrants of $1.9
million. 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--Commercial Business Lending."
Private equity fund management fees decreased $2.2 million from the
Company's subsidiary PCM as the Company exited the venture fund management
business at December 31, 2001. Consulting fees declined $1.1 million from the
Company's subsidiary KMR. Lease financing fees decreased $533,000 as the Company
winds down its discontinued leasing portfolio. Partially offsetting these
decreases were service charges on deposits which increased $1.1 million. This
41% growth is primarily attributable to new deposit products offered during the
first quarter of 2002.
Non-interest Expense
Total non-interest expense was $32.2 million for 2002, a decrease of
$5.1 million compared to $37.3 million for 2001. Salaries and employee benefits
decreased by $3.1 million in 2002 mainly due to the Company exiting the fund
management, TechBanc and Asset-Based Lending businesses, lower staffing levels
at Progress Leasing Company and decreased commission volume for Progress
Financial Resources, Inc. which were partially offset by additional expense to
support the Company's expanded community based banking strategy. Professional
services expenses decreased $1.1 million primarily due to a reduction in the
business activities of KMR Management, Inc. in 2002, Progress Capital
Management, Inc. exiting the fund management business and legal expenses related
to collecting loans to pre-profit companies during 2001. Other expenses
decreased $600,000 in 2002 primarily due to broker expenses and write-downs of
used asset inventory for Progress Leasing Company during 2001.
Income Tax Expense
The Company recorded income tax expense from continuing operations
of $2.3 million during 2002 compared to $200,000 in 2001. The changes in income
tax expense were primarily due to changes in taxable income.
Results of Operations--2001 Versus 2000
The Company reported net income of $544,000 for the year ended December
31, 2001, in comparison with $7.3 million for the year 2000. Basic net income
per common share was $.10 for 2001 and $1.26 for 2000. Fully diluted net income
per common share was $.10 for 2001 and $1.22 for 2000. Income from continuing
operations was $544,000 for the year ended December 31, 2001, in comparison with
$5.7 million for the year 2001. During 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%.
Net Interest Income
Net interest income on tax-equivalent basis decreased to $29.8 million
for 2001, in comparison with $30.3 million for 2000. Although there was a $12.7
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 3.52% for 2001 compared to 3.92% for 2000. The margin was compressed by an
environment of decreases in short-term rates during 2001 of 475 basis points.
The Company reclassified its capital securities to debt and the related expense
from non-interest expense to interest on borrowings. This reclassification
reduced the net interest margin by 27 basis points and 25 basis points,
respectively, for the years ended December 31, 2001 and 2000.
Provision for Loan and Lease Losses
The provision for loan and lease losses amounted to $7.1 million in
2001 compared to $4.4 million in 2000. The ratio of the allowance for loan and
lease losses to total non-performing loans and leases was 106.28% and 183.61% at
December 31, 2001 and 2000, respectively.
15
Non-interest Income
Non-interest income was $15.8 million in 2001, a decrease of $3.7
million compared to $19.5 million for 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, 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 which was 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 2001 due to the permanent impairment of equity securities of U. S.
Interactive, Inc. (USIT) acquired upon the exercise of warrants. USIT filed for
protection under the bankruptcy court during 2001. The $1.9 million loss
represents the amount which was previously included in client warrant income
during 2000 related to market appreciation on these same warrants recorded in
accordance with FASB 133.
Mutual fund, annuity and insurance commissions from the Company's
subsidiary PFR decreased $1.5 million in 2001 compared to 2000. 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 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 Expense
Non-interest expense for 2001 amounted to $37.3 million compared to
$36.4 million in 2000. Professional services expense increased $1.2 million in
2001 primarily due to the business activities of KMR and legal expenses related
to collecting loans to pre-profit companies. Occupancy expense increased
$239,000 mainly due to the establishment of four new banking offices. Other
expenses increased $517,000 primarily due to write-offs related to PLC including
a write-down of used asset inventory for $422,000. Salaries and employee
benefits decreased $1.0 million in 2001 mainly due to lower commission expense
for PFR.
Income Tax Expense
The Company recorded income tax expense from continuing operations of
$200,000 during 2001 compared to $3.0 million in 2000. Income tax expense from
the gain on sale of and income from discontinued operations was $1.1 million
during 2000. 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.
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.
16
At December 31, 2002, the total of approved loan commitments amounted
to $52.6 million, and the Company had $144.8 million of undisbursed loan funds.
At December 31, 2002, total FHLB borrowings that are scheduled to mature during
the 12 months ending December 31, 2003 totaled $15.0 million. At December 31,
2002, total securities purchased under agreement to resell which are scheduled
to mature during the 12 months ending December 31, 2003 totaled $81.1 million.
At December 31, 2002, the amount of time deposits that are scheduled to mature
within 12 months totaled $256.3 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, 2002 was approximately
$451.8 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 2002, the Company reinvested its working
capital primarily by purchasing mortgage-backed securities to maintain its
liquidity. 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. For the
year ended December 31, 2002, cash was provided by operating activities. Cash
was used in investing activities primarily due to purchases of mortgage-backed
securities partially offset by sales and repayments on mortgage-backed
securities. Cash was provided by financing activities during 2002 primarily due
to increases in deposits and a net increase in short-term borrowings. 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 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 required the Bank to (i) reduce its lending to
early stage technology companies; (ii) increase its leverage capital ratio to no
less than 8.0% and its total risk-basked capital ratio to no less than 14.0% by
April 1, 2002 through gradual compliance; and (iii) increase its valuation
allowance and implement improved credit review and monitoring programs. In
addition, the Company could not pay cash dividends on its capital stock until
the Bank achieved the required capital levels and had implemented an acceptable
capital plan. As such, the Company had suspended the quarterly cash dividend on
its common stock and its stock repurchase program and had undertaken measures to
achieve capital compliance as promptly as possible. The increased capital levels
reflect the Bank's level of business lending, particularly in the technology
sector, and continued economic concerns.
On February 7, 2002 the OTS approved the Company's revised Capital
Enhancement Plan and on June 25, 2002 the OTS agreed to extend the dates by
which the Bank must comply with the targeted ratio of classified assets to
capital. As revised, the Bank's classified assets to capital ratio could not
exceed 25% on September 30, 2002 and could not exceed 20% on March 31, 2003. The
Bank worked aggressively to reduce the ratio and comply with the terms of the
directive. The Company achieved the required capital levels at the Bank and both
the Company and the Bank are in full compliance with the OTS approved capital
plan. On July 30, 2002, the Company reinstated its quarterly cash dividend on
its common stock.
17
On October 23, 2002, the OTS released the Company and Progress Bank
from the Supervisory Directive and the Individual Minimum Capital Directive.
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.
At December 31, 2002, the Bank met all regulatory capital requirements.
At December 31, 2002, the Bank's leverage capital ratio was 7.82%, Tier 1
risk-based capital ratio was 14.09%, total risk-based ratio was 15.20% and
tangible equity ratio was 7.80%, based on leverage capital of $77.9 million,
Tier 1 risk-based capital of $77.9 million, total risk-based capital of $84.0
million, and tangible capital of $77.6 million, respectively. As of December 31,
2002, the Bank is classified as "well capitalized."
In December 2002, the Company issued $5.0 million of variable rate,
currently 4.76% (three-month LIBOR plus 3.35%, capped at 12.5% until January 7,
2008, the date on which the Company can call the capital securities) capital
securities due January 7, 2033 (the "Capital Securities IV") in a private
offering managed by Credit Suisse First Boston. The Capital Securities IV were
issued by the Company's recently formed subsidiary, Progress Capital Trust IV, a
statutory business trust created under the laws of Delaware. The Company is the
owner of all of the preferred and common securities of the Trust. The Trust
issued $5.0 million of Capital Securities IV (and together with the preferred
and common securities of the Trust, the "Trust Securities IV"), the proceeds
from which were used by the Trust, along with the Company's $155,000 capital
contribution for the Common Securities, to acquire $5.2 million aggregate
principal amount of the Company's Junior Subordinated Debentures due January 7,
2033 (the "Debentures"), which constitute the sole assets of the Trust. The
Company has fully, irrevocably and unconditionally guaranteed all of the Trust's
obligations under the Capital Securities IV. Net proceeds from the sale of the
securities will be used for general purposes, including but not limited to,
repurchases of the Company's common stock under its existing stock repurchase
program.
In November 2002, the Company issued $10.0 million of variable rate,
currently 4.96% (three-month LIBOR plus 3.35%, capped at 12% until November 15,
2007, the date on which the Company can call the capital securities), capital
securities due November 8, 2032 (the "Capital Securities III") in a private
offering managed by Trapeza CDO I, LLC. The Capital Securities III were issued
by the Company's subsidiary, Progress Capital Trust III (the "Trust III"), a
statutory business trust created under the laws of Delaware. The Company is the
owner of all of the common securities of the Trust III (the "Common
Securities"). The Trust III issued $10.0 million of variable rate Capital
Securities III (and together with the Common Securities, the "Trust III
Securities"), the proceeds from which were used by the Trust III along with the
Company's $310,000 capital contribution for the Common Securities, to acquire
$10.3 million aggregate principal amount of the Company's variable rate Junior
Subordinated Notes due November 8, 2032 (the "Notes"), which constitute the sole
assets of the Trust III. The Company has fully, irrevocably and unconditionally
guaranteed all of the Trust III's obligations under the Capital Securities III.
Net proceeds from the sale of the capital securities were used for general
purposes, including but not limited to, the retirement of the subordinated
debentures, retirement of previously issued capital securities and for
repurchases of the Company's common stock under its existing stock repurchase
program.
In July 2000, the Company issued 6,000 shares, or $6.0 million, of
11.445% trust preferred securities, $1,000 liquidation amount per security, due
July 19, 2030 (the "Capital Securities II"), in a private offering managed by
First Union Securities, Inc. The Capital Securities II represent undivided
beneficial interests in Progress Capital Trust II (the "Trust II"), a statutory
business trust created under the laws of Delaware, which was established by the
Company for the purpose of issuing the Capital Securities II. The Company has
fully, irrevocably and unconditionally guaranteed all of the Trust II's
obligations under the Capital Securities II. 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.
18
During 1997 the Company issued $15.0 million of 10.5% capital
securities due June 1, 2027 (the "Capital Securities"). The Capital Securities
were issued by the Company's recently formed subsidiary, Progress Capital Trust
I, a statutory business trust created under the laws of Delaware. The Company is
the owner of all of the common securities of the Trust (the "Common
Securities"). The Trust issued $15.0 million of 10.5% Capital Securities (and
together with the Common Securities, the "Trust Securities"), the proceeds from
which were used by the Trust, along with the Company's $464,000 capital
contribution for the Common Securities, to acquire $15.5 million aggregate
principal amount of the Company's 10.5% Junior Subordinated Deferrable Interest
Debentures due June 1, 2027 (the "Debentures"), which constitute the sole assets
of the Trust. The Company has, through the Declaration of Trust establishing the
Trust, Common Securities and Capital Securities Guarantee Agreements, the
Debentures and a related Indenture, taken together, fully irrevocably and
unconditionally guaranteed all of the Trust's obligations under the Trust
Securities. The Company contributed approximately $6.0 million of the net
proceeds to Progress Bank, to increase its regulatory capital ratios and support
the growth of the expanded lending operations. Net proceeds retained by the
Company were used for general purposes, including investments in other
subsidiaries and potential future acquisitions. During 2002, the Company retired
$6.3 million of the capital securities and recorded a loss on the extinguishment
of debt of $25,000.
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.
19
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, 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------
Interest-earning assets:
Interest-earning deposits $ 14,588 $ 219 1.50% $ 25,606 $ 945 3.69% $ 21,244 $ 1,320 6.21%
Securities:
Trading securities -- -- -- -- -- -- 264 -- --
Taxable investment securities(1) 26,509 1,447 5.46 33,769 2,127 6.30 50,709 3,507 6.92
Tax-exempt investment
securities(2) 20,032 1,522 7.60 14,850 1,156 7.78 14,820 923 6.23
Mortgage-backed securities (1) 310,517 16,929 5.45 218,012 13,935 6.39 145,056 10,461 7.21
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total securities 357,058 19,898 5.57 266,631 17,218 6.46 210,849 14,891 7.06
Loans:
Commercial business loans(2)(3) 97,606 5,699 5.84 175,959 14,642 8.32 146,332 13,801 9.43
Commercial real estate loans(2)(3) 195,807 14,986 7.65 190,313 16,191 8.51 170,180 14,980 8.80
Construction loans 84,376 5,421 6.42 69,889 6,075 8.69 54,435 5,944 10.92
Single family residential real
estate loans 27,438 1,904 6.94 31,312 2,633 8.41 39,078 2,991 7.65
Consumer loans 46,660 2,854 6.12 40,714 2,994 7.35 37,538 3,049 8.12
Lease financing(2) 27,717 2,817 10.16 45,518 4,750 10.44 93,615 10,446 11.16
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total loans 479,604 33,681 7.02 553,705 47,285 8.54 541,178 51,211 9.46
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-earning assets 851,250 53,798 6.32 845,942 65,448 7.74 773,271 67,422 8.72
-------- ------- ----- -------- ------- ----- -------- ------- -----
Non-interest-earning assets:
Cash 15,401 16,568 16,762
Allowance for loan and lease losses (8,457) (8,956) (6,263)
Other assets 45,235 42,273 49,535
-------- -------- --------
Total non-interest-earning
assets 52,179 49,885 60,034
-------- -------- --------
Total assets $903,429 $895,827 $833,305
======== ======== ========
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and Super NOW $107,385 1,310 1.22 $113,406 2,844 2.51 $ 91,975 3,119 3.39
Money market accounts 81,281 1,716 2.11 42,382 1,112 2.62 37,223 1,172 3.15
Passbook and statement savings 32,373 311 .96 28,892 425 1.47 29,752 527 1.77
Time deposits 341,604 12,328 3.61 364,891 19,016 5.21 329,874 19,344 5.86
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing deposits 562,643 15,665 2.78 549,571 23,397 4.26 488,824 24,162 4.94
Short-term borrowings 39,500 1,172 2.97 36,513 1,759 4.82 76,515 4,707 6.15
Long-term debt 130,591 7,258 5.56 145,566 8,216 5.64 108,752 6,306 5.80
Capital securities 20,554 2,230 10.85 20,245 2,278 11.25 17,795 1,907 10.71
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities 753,288 26,325 3.49 751,895 35,650 4.74 691,886 37,082 5.35
-------- ------- ----- -------- ------- ----- -------- ------- -----
Non-interest-bearing liabilities:
Non-interest-bearing deposits 79,853 77,352 72,626
Other liabilities 7,703 14,440 20,652
-------- -------- --------
Total non-interest-bearing
liabilities 87,556 91,792 93,278
-------- -------- --------
Total liabilities 840,844 843,687 785,164
Shareholders' equity 62,585 52,140 48,141
-------- -------- --------
Total liabilities and
shareholders' equity $903,429 $895,827 $833,305
======== ======== ========
Net interest income $27,473 $29,798 $30,340
======= ======= =======
Interest rate spread (4) 2.83% 3.00% 3.36%
Effect of net interest-free funding
sources(5) .40 .52 .56
------ ------ ------
Net interest margin (6) 3.23% 3.52% 3.92%
====== ====== ======
Average interest-earning assets to
average interest-bearing
liabilities 113.00% 112.51% 111.76%
====== ====== ======
(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 and
shareholders' equity.
(6) Represents net interest income divided by average interest-earning assets.
20
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, 2002 vs. 2001 2001 vs. 2000
--------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
------------------------------------------------------------
Interest-earning assets:
Interest-earning deposits ($ 305) ($421) ($726) $ 234 ($609) ($375)
Securities:
Taxable investment securities (419) (261) (680) (1,088) (292) (1,380)
Tax-exempt securities 394 (28) 366 2 231 233
Mortgage-backed securities 5,266 (2,272) 2,994 4,773 (1,299) 3,474
------ ------- ------- ------ ------- -----
Total securities 5,241 (2,561) 2,680 3,687 (1,360) 2,327
Loans:
Commercial business (5,357) (3,586) (8,943) 2,586 (1,745) 841
Commercial real estate loans 460 (1,665) (1,205) 1,720 (509) 1,211
Construction loans 1,114 (1,768) (654) 1,488 (1,357) 131
Single family residential real estate
loans (302) (427) (729) (635) 277 (358)
Consumer loans 402 (542) (140) 247 (302) (55)
Lease financing (1,809) (124) (1,933) (5,061) (635) (5,696)
------ ------- ------- ------ ------- -----
Total loans (5,492) (8,112) (13,604) 345 (4,271) (3,926)
--------------------------------------------------------------------------------------------------------
Interest income (556) (11,094) (11,650) 4,266 (6,240) (1,974)
--------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
NOW and Super NOW (144) (1,390) (1,534) 636 (911) (275)
Money market accounts 855 (251) 604 151 (211) (60)
Passbook and statement savings 46 (160) (114) (15) (87) (102)
Time deposits (1,151) (5,537) (6,688) 1,937 (2,265) (328)
------ ------- ------- ------ ------- -----
Total deposits (394) (7,338) (7,732) 2,709 (3,474) (765)
Short-term borrowings 134 (721) (587) (2,085) (863) (2,948)
Long-term debt (842) (116) (958) 2,088 (178) 1,910
Capital securities 34 (82) (48) 273 98 371
--------------------------------------------------------------------------------------------------------
Interest expense (1,068) (8,257) (9,325) 2,985 (4,417) (1,432)
--------------------------------------------------------------------------------------------------------
Net interest income $ 512 ($2,837) ($2,325) $1,281 ($1,823) ($542)
========================================================================================================
Investment and Mortgage-Backed Securities
Investment and mortgage-backed securities are comprised of the
following at December 31, 2002, 2001 and 2000:
Held to Maturity Available for Sale
-------------------------------------------------
Amortized Estimated Amortized Estimated
December 31, 2002 Cost Fair Value Cost Fair Value
-------------------------------------------------------------------------------------------------
FHLB stock $ 8,401 $ 8,401 $ -- $ --
U.S. agency obligations 3,330 3,382 10,653 10,666
Bank deposits -- -- 166 166
Corporate bonds -- -- 8,034 7,676
Municipal bonds 34,805 35,351 -- --
Equity investments -- -- 1,696 1,685
Mortgage-backed securities 73,470 74,834 333,139 339,097
-------------------------------------------------------------------------------------------------
Total investment and mortgage-backed
securities $120,006 $121,968 $353,688 $359,290
=================================================================================================
21
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
=================================================================================================
Held to Maturity Available for Sale
-------------------------------------------------
December 31, 2000 Amortized Estimated Amortized Estimated
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
=================================================================================================
The following table sets forth the contractual maturities of the
investment and mortgage-backed securities at December 31, 2002 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 $ 8,657 $ 176 $ -- $ 8,833 1.08%
Due after one year through 5 years 2,009 6,306 -- 8,315 5.23
Due after 5 years through 10 years -- -- -- -- --
Due after 10 years -- 1,360 -- 1,360 2.51
Mortgage-backed securities 339,097 -- -- 339,097 5.91
Equity securities -- 1,685 -- 1,685 .03
-------------------------------------------------------------------------------------------------------------
Total available for sale $349,763 $9,527 $ -- $359,290 5.73%
=============================================================================================================
Held to maturity:
Due after 5 years through 10 years $ -- $ -- $ 785 $ 785 6.83%
Due after 10 years 3,331 -- 34,020 37,350 6.88
FHLB stock 8,401 -- -- 8,401 3.25
Mortgage-backed securities 73,470 -- -- 73,470 5.74
-------------------------------------------------------------------------------------------------------------
Total held to maturity $ 85,202 -- $34,805 $120,006 5.93%
=============================================================================================================
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.
22
The Company's net loan and lease portfolio, including loans held for
sale, totaled $459.4 million at December 31, 2002 or 45.1% of its total assets,
a decrease of $61.2 million or 11.8% from the $520.6 million outstanding at
December 31, 2001.
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, 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------------------------------------
Commercial business(1) $ 83,994 18.03% $146,844 27.68% $175,972 32.40% $119,807 23.79% $ 92,737 21.87%
Commercial real estate(2) 199,672 42.87 197,394 37.21 178,874 32.93 162,588 32.28 134,380 31.69
Construction 87,728 18.83 77,380 14.58 60,172 11.08 58,813 11.68 44,546 10.51
Single family
residential mortgage 26,870 5.77 26,518 5.00 34,676 6.39 40,554 8.05 50,086 11.81
Consumer loans 50,105 10.76 44,821 8.45 37,242 6.86 34,918 6.93 28,738 6.78
Lease financing 17,444 3.74 37,572 7.08 56,183 10.34 86,985 17.27 73,499 17.34
----------------------------------------------------------------------------------------------------------
Total loans and leases 465,813 100.00% 530,529 100.00% 543,119 100.00% 503,665 100.00% 423,986 100.00%
====== ====== ====== ====== ======
Allowance for loan
and lease losses (6,463) (9,917) (7,407) (5,927) (4,490)
-------- -------- -------- -------- --------
Net loans and leases $459,350 $520,612 $535,712 $497,738 $419,496
======== ======== ======== ======== ========
(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.
The following table sets forth the scheduled contractual maturities of
the Company's commercial loans at December 31, 2002. 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, 2002 Mortgage Construction Business
-------------------------------------------------------------------------------------------------
Amounts due:
One year or less $45,212 $54,674 $ 10,231
After one year through five years 23,757 33,054 51,330
Beyond five years 15,025 -- 138,111
-------------------------------------------------------------------------------------------------
Total $83,994 $87,728 $199,672
=================================================================================================
Interest rate terms on amounts due after one year:
Fixed $15,092 $ -- $ 71,537
-------------------------------------------------------------------------------------------------
Adjustable $23,690 $33,054 $117,904
-------------------------------------------------------------------------------------------------
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, 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Loans and leases accounted for on a non-accrual
basis(1) $5,447 $9,331 $ 4,034 $5,701 $3,683
REO, net of related reserves -- 1,533 1,750 66 --
- -----------------------------------------------------------------------------------------------------------------------
Total non-performing assets 5,447 10,864 5,784 5,767 3,683
Accruing loans 90 or more days past due 918 1,125 4,502 2,336 4,030
- -----------------------------------------------------------------------------------------------------------------------
Total underperforming assets $6,365 $11,989 $10,286 $8,103 $7,713
- -----------------------------------------------------------------------------------------------------------------------
Non-performing assets as a percentage of net loans
and leases and real estate owned 1.19% 2.08% 1.08% 1.16% .88%
=======================================================================================================================
Non-performing assets as a percentage of total
assets .54% 1.28% .63% .75% .57%
=======================================================================================================================
Underperforming assets as a percentage of net loans
and leases and real estate owned 1.39% 2.30% 1.91% 1.63% 1.84%
=======================================================================================================================
Underperforming assets as a percentage of total
assets .63% 1.41% 1.13% 1.05% 1.19%
=======================================================================================================================
(1) Includes $600,000 in Troubled Debt Restructurings
23
Gross interest income that would have been recorded during 2002, 2001
and 2000 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 $633,000, $811,000 and $351,000, respectively. The amount of interest income
that was actually recorded during 2002, 2001 and 2000 with respect to such
non-accrual loans and leases amounted to approximately $134,000, $429,000 and
$175,000, respectively.
The $5.4 million of non-accrual loans and leases at December 31, 2002
consists of $326,000 of loans secured by first liens on single-family
residential property, $158,000 of loans secured by commercial property, $4.2
million of commercial business loans (of which $600,000 are troubled debt
restructurings), $346,000 of consumer loans and $402,000 of lease financing. The
largest underperforming customer had an aggregate non-accrual loan balance of
$2.8 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. While the customer continue to make payments, the
ultimate collectibility of all principal and interest is uncertain.
The accrual of interest on commercial business loans, mortgage loans
and leases is generally discontinued when the loans and leases become 90 days
past due and when, in management's judgment, 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; however, subsequent payments of interest on commercial business loans
can be recognized on a cash basis provided under management's assessment that
full collection of principal is expected and documented. 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, 2002, other
loans with a total principal balance of $2.6 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.
24
The following table sets forth the recorded investment in impaired
loans and the related valuation allowance for each loan category as of December
31, 2002 and 2001:
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, 2002
-----------------------------------------------------------------------------------------------------
Commercial business $ 7,512 $ -- $ 7,512 $1,304
Commercial real estate 270 -- 270 27
Construction -- -- -- --
-----------------------------------------------------------------------------------------------------
Total $ 7,782 $ -- $ 7,782 $1,331
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------------------
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, 2002, 2001 and 2000 were $12.1 million, $12.3 million
and $3.8 million, respectively. Interest income recognized on impaired loans
totaled $364,000 for 2002, $538,000 for 2001 and $176,000 for 2000.
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, 2002, the balance of
impaired loans included non-accrual loans of $4.4 million and loans 90 days or
more past due of $836,000. 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.
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, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------- ------- -------- -------
Delinquencies:
30 to 59 days $3,205 .69% $ 4,214 .80% $ 6,255 1.15%
60 to 89 days 1,511 .32 5,962 1.12 1,480 .27
90 or more days 918 .20 1,125 .21 4,502 .83
- --------------------------------------------------------------------------------------------------------------------------
Total $5,634 1.21% $11,301 2.13% $12,237 2.25%
==========================================================================================================================
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, 2002,
include: retail consumers that account for 17% of all credit extensions;
commercial mortgages and construction that account for 49%; residential
construction that account for 12%; and commercial business that accounts for
22%.
25
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, 2002 2001 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Loans Loans to Loans to Loans to Loans to
to Total Total Total Total Total
Loans Loans Loans Loans Loans
and and and and and
Amount Leases Amount Leases(1) Amount Leases Amount Leases Amount Leases
- ----------------------------------------------------------------------------------------------------------------------------
Commercial business $2,691 18.03% $5,062 24.47% $2,342 32.40% $1,256 23.79% $ 930 21.87%
Commercial real
estate 1,728 42.87 2,441 38.64 2,332 32.93 1,384 32.28 1,134 31.69
Construction 1,261 18.83 1,030 15.32 1,068 11.08 885 11.68 652 10.51
Single family
residential mortgage 64 5.77 89 5.25 176 6.39 436 8.05 116 11.81
Consumer 273 10.76 229 8.88 15 6.86 39 6.93 39 6.78
Lease financing 446 3.74 1,066 7.44 1,474 10.34 1,927 17.27 1,619 17.34
- ----------------------------------------------------------------------------------------------------------------------------
Total $6,463 100.00% $9,917 100.00% $7,407 100.00% $5,927 100.00% $4,490 100.00%
============================================================================================================================
(1) Does not include loans held for sale.
The following table details the Company's allowance for loan and lease
losses for the periods indicated:
- ---------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Average loans and leases outstanding $479,604 $553,705 $541,178 $454,479 $373,545
- ---------------------------------------------------------------------------------------------------------------------
Balance beginning of period $9,917 $7,407 $5,927 $4,490 $3,863
Charge-offs:
Commercial business:
TechBanc 4,577 2,378 1,268 -- --
All other commercial business 535 309 449 -- 2
- ---------------------------------------------------------------------------------------------------------------------
Total commercial business 5,112 2,687 1,717 -- 2
Commercial real estate 757 42 -- -- --
Single family residential mortgage -- 10 52 79 --
Consumer 20 30 10 2 72
Lease financing 2,165 2,530 1,839 2,473 681
- ---------------------------------------------------------------------------------------------------------------------
Total charge-offs 8,054 5,299 3,618 2,554 755
- ---------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial business:
TechBanc 410 430 113 17 115
All other commercial business 45 17 8 1 13
- ---------------------------------------------------------------------------------------------------------------------
Total commercial business 455 447 121 18 128
Commercial real estate 9 -- 7 -- 5
Construction -- -- -- -- 2
Single family residential mortgage -- 11 2 -- 1
Consumer 3 5 6 16 12
Lease financing 319 230 546 409 275
- ---------------------------------------------------- ------------ ------------ ------------ ------------- -----------
Total recoveries 786 693 682 443 423
- ---------------------------------------------------------------------------------------------------------------------
Net charge-offs 7,268 4,606 2,936 2,111 332
Provision for loan and lease losses 3,814 7,116 4,416 3,548 959
- ---------------------------------------------------- ------------ ------------ ------------ ------------- -----------
Balance at end of period $6,463 $9,917 $7,407 $5,927 $4,490
=====================================================================================================================
Specific Valuation Allowance on Impaired Loans 314 354 -- 13 16
- ---------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs during the period to
average loans and leases outstanding during the
period 1.52% .83% .54% .46% .09%
- ---------------------------------------------------------------------------------------------------------------------
Ratio of allowance for loan and lease losses to
non-performing loans and leases at end of period 118.65% 106.28% 183.61% 103.96% 121.91%
- ---------------------------------------------------------------------------------------------------------------------
Ratio of allowance for loan and lease losses to
under-performing loans and leases at end of
period(1) 101.54% 94.85% 86.77% 73.75% 58.21%
- ---------------------------------------------------------------------------------------------------------------------
Ratio of allowance for loan and lease losses to
total loans and leases at end of period 1.39% 1.87% 1.36% 1.18% 1.06%
- ---------------------------------------------------------------------------------------------------------------------
(1) Includes loans 90 or more days delinquent and still accruing.
26
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.
Deposits
Certificates of deposit in amounts of $100,000 or more were $105.2
million, $124.6 million and $125.5 million at December 31, 2002, 2001 and 2000,
including brokered certificates of deposits of $36.9 million, $29.4 million and
$30.0 million, respectively.
The following table presents the remaining maturity of certificates of
deposits of $100,000 or more at December 31, 2002:
- -----------------------------------------------------------------------------------------------------------------
Remaining Maturity > 3 months > 6 months > 12 months
At December 31, 2002 3 months or less through 6 months through 12 months
- -----------------------------------------------------------------------------------------------------------------
Certificates of Deposit $100,000 or $33,089 $36,264 $19,337 $16,508
more
=================================================================================================================
Short-Term Borrowings
The following table presents certain information regarding short-term
securities sold under agreement to repurchase:
- -------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
Balance outstanding at end of period $81,125 $ -- $53,700
Weighted average interest rate at end of period 2.35% --% 6.34%
Average balance outstanding $35,515 $35,303 $66,259
Weighted average interest rate during the period 3.02% 4.78% 6.06%
Maximum amount outstanding at any month-end during the period $81,125 $67,499 $77,710
Contractual Obligations and Commercial Commitments
The following table presents future payments under contractual cash
obligations as of December 31, 2002:
Payments Due by Period
-----------------------------------------------------------------------------------------
Contractual Obligations Less than 1 Year 1 Through 3 Years 4 Through 5 Years After 5 Years Total
- -------------------------------------------------------------------------------------------------------------------------------
Long-term Debt $ -- $71,259 $13,802 $36,666 $121,727
Capital Securities(1) -- -- -- 29,750 29,750
Operating Leases 1,271 2,268 1,594 -- 5,133
-----------------------------------------------------------------------------------------
Total Contractual Obligations $1,271 $73,527 $15,396 $66,416 $156,610
=========================================================================================
(1)Gross of deferred costs
The following table presents possible future payments under outstanding
commitments as of December 31, 2002:
Amount of Commitment Expiration by Period
-----------------------------------------------------------------------------------------
Commercial Commitments Less than 1 Year 1 Through 3 Years 4 Through 5 Years After 5 Years Total
- -------------------------------------------------------------------------------------------------------------------------------
Unused Lines of Credit $95,237 $49,566 $ -- $ -- $144,803
Commitments to Extend Credit 52,601 -- -- -- 52,601
Letters of Credit 6,543 1,090 -- -- 7,633
-----------------------------------------------------------------------------------------
Total Commercial Commitments $154,381 $50,656 $ -- $ -- $205,037
=========================================================================================
27
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.
28
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 to
three months one year One to five years Five to ten years Over ten years
At December 31, 2002 Amount Yield/Rate Amount Yield/Rate Amount Yield/Rate Amount Yield/Rate Amount Yield/Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-earnings assets (1)
Interest-earning deposits $ 17,570 1.15% $ -- --% $ -- --% $ -- --% $ -- --%
Investment securities 22,944 2.33 4,705 6.54 15,456 6.26 23,570 6.89 410 7.17
Mortgage-backed securities 25,114 5.02 118,644 4.97 205,505 5.08 54,802 5.01 2,544 5.37
Commercial business 58,355 5.62 8,322 7.06 10,671 7.56 2,078 6.99 200 6.30
Commercial real estate loans 39,462 6.20 27,806 7.78 126,884 7.68 5,921 7.68 83 8.11
Construction loans 86,058 6.31 2,267 7.40 -- -- -- -- -- --
Single family residential 3,203 6.28 17,642 5.86 5,296 7.12 424 7.48 21 7.48
Consumer loans 29,534 4.34 2,862 7.60 10,878 7.42 4,581 7.60 1,698 7.74
Lease financing 1,998 10.10 9,400 10.10 5,334 10.10 -- -- -- --
----------------------------------------------------------------------------------------------------
Total interest-earning
assets $284,238 5.22% $191,648 5.91% $380,024 6.23% $ 91,376 5.86% $ 4,956 6.42%
====================================================================================================
Interest-bearing liabilities: (2)
Money market deposits $ 8,023 1.96% $ 16,048 1.96% $52,782 1.96% $ 21,110 1.96% $ 7,600 1.96%
NOW and Super NOW 5,071 1.06 15,212 1.06 49,607 1.06 20,280 1.06 3,012 1.06
Passbook and statement 855 .74 2,565 .74 18,781 .74 8,536 .74 3,411 .74
savings
Time deposits 87,416 2.77 169,176 2.84 101,839 4.02 139 4.08 -- --
Short-term borrowings 86,795 1.92 10,087 5.63 -- -- -- -- -- --
Long-term debt -- -- -- -- 121,727 5.19 -- -- -- --
Capital securities 10,000 4.96 5,000 4.76 -- -- -- -- 14,750 10.88
----------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $198,160 2.42% $218,088 2.80% $344,736 3.52% $ 50,065 1.39% $ 28,773 6.29%
====================================================================================================
Excess (deficiency) of
interest-earning assets
over interest-bearing
liabilities $ 86,078 $(26,440) $35,288 $ 41,311 $(23,817)
====================================================================================================
Cumulative excess of
interest-earning assets over
interest-bearing liabilities $ 86,078 $59,638 $94,926 $136,237 $112,420
====================================================================================================
Cumulative excess of
interest-earning assets over
interest-bearing liabilities
as a percent of total assets 8.46% 5.86% 9.33% 13.38% 11.04%
====================================================================================================
(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 $5.4 million at
December 31, 2002. Interest earning assets do not include loan loss
reserves, deferred loan fees, and mark-to market adjustment on available for
sale securities.
(2) 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.
Interest-bearing liabilities do not include deferred costs on capital
securities.
..
The Company also monitors its interest rate sensitivity using a model
which estimates the change in its net portfolio value ("NPV") in the event of a
range of assumed changes in market interest rates. NPV is defined as the current
market value of the Bank's assets, less the current market value of its
liabilities, plus or minus the current value of off-balance-sheet items. The
change in NPV measures the Bank's vulnerability to changes in interest rates by
estimating the change in the market value of its assets, liabilities and
off-balance-sheet items as a result of an instantaneous change in the general
level of interest rates.
As market interest rates decrease, the average maturities of the
Bank's loans and investment securities shorten due to quicker prepayments, which
would cause a relatively moderate increase in their value. Most of the Bank's
deposit account rates have less sensitive rate movements than that of market
rates, which results in the value of deposits decreasing more quickly than the
value of assets increasing. As market rates increase, the average maturities of
many of the Bank's assets would extend due to slowing prepayments, while most
liabilities, including deposits, have less sensitivity to market rates,
resulting in a decline in the value of assets, which would exceed the increasing
value of the liabilities.
29
The following table lists the percentage change in the Bank's net
portfolio value (NPV) assuming an immediate rise or fall in interest rates of
100, 200 and 300 basis points from the level at December 31, 2002.
Net Portfolio Value Net Portfolio Value as a % of Assets
------------------------------------------------------------------------------------------------
Change in Rates in Net Portfolio
Basis Points Dollar Amount Dollar Change Percentage Change Value Ratio Basis Point Change
-----------------------------------------------------------------------------------------------------------------------
300 $66,677 $(25,090) (27.3)% 6.99% (201)
200 77,906 (13,861) (15.1) 7.97 (103)
100 87,742 (4,025) (4.4) 8.77 (23)
Flat 91,767 -- -- 9.00 --
(100) 88,087 (3,680) (4.0) 8.54 (46)
The calculations in the NPV table above indicate that the Bank's NPV
would be adversely affected by increases or decreases interest rates. The table
does not assume negative interest rates and therefore only reflects an interest
rate reduction of 100 basis points. In addition, the Bank is deemed to have
minimal interest rate risk under applicable regulatory capital requirements.
The Company also performs models on net interest income sensitivity to
changing rates across a wide range of rate scenarios. 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, 2002 the Company would experience an approximate 3.5% increase in net
interest income over a one year period if rates rise 200 basis points in
comparison to a flat rate scenario and an approximate 1.1% decrease in net
interest income if rates decline 200 basis points.
For all of the models, including net interest income sensitivity, NPV
and GAP, certain assumptions have to be made that may or may not actually
reflect how actual yields and costs will react to market interest rates. For
example, the NPV model assumes that the makeup of the Bank's interest rate
sensitive assets and liabilities will remain constant over the period being
measured. Thus, although using such a model can be instructive in providing an
indication of the Company's exposure to interest rate risk, it cannot precisely
forecast the effects of a change in market interest rates, and the results
indicated by the model are likely to differ from actual results. Modeling net
interest income across a wide range of scenarios allows the Company to make
assumptions on future growth of the balance sheet.
30
Item 8. Financial Statements and Supplementary Data
Consolidated Balance Sheets
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------------------------
At December 31, 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from other financial institutions:
Non-interest earning $ 20,650 $ 21,250
Interest earning 17,570 11,276
Investments and mortgage-backed securities:
Available for sale at fair value (amortized cost: $353,688 in 2002 and $212,793 in 2001) 211,828 359,290
Held to maturity at amortized cost (fair value: $121,968 in 2002 and $38,020 in 2001 38,173 120,006
Loans and leases, net (net of reserves: $6,463 in 2002 and $9,917 in 2001) 459,350 495,025
Loans held for sale -- 25,587
Investments in unconsolidated entities 999 1,985
Premises and equipment, net 26,726 26,038
Accrued interest receivable 4,804 4,551
Net deferred income tax assets 3,357 4,839
Other assets 5,092 10,828
---------- --------
Total assets $1,017,844 $851,380
========== ========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest-bearing $ 100,075 $ 84,783
Interest-bearing 591,463 544,740
Short-term borrowings:
Securities sold under agreement to repurchase 81,125 --
Other short-term borrowings 15,757 200
Long-term debt 121,727 137,368
Subordinated debt -- 3,000
Capital securities 20,260
28,836
Accrued interest payable 3,554 3,526
Deferred tax liabilities 1,609
3,326
Other liabilities 5,252 5,295
---------- --------
Total liabilities 951,115 800,781
---------- --------
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; 12,000,000 shares authorized; and 7,058,000 and 5,818,000
shares issued and outstanding at December 31, 2002 and December 31, 2001, respectively 7,058 5,818
Treasury stock (114,000 and 84,000 shares at December 31, 2002 and December 31, 2001,
respectively) (628) (1,050)
Unearned Employee Stock Ownership Plan shares (169,000 and 182,000 shares at December 31,
2002 and December 31, 2001, respectively) (1,341) (1,448)
Unearned compensation-- restricted stock awards (75) (107)
Capital surplus 51,536 44,029
Retained earnings 6,936 3,620
Net accumulated other comprehensive income (loss) 3,665 (685)
---------- --------
Total shareholders' equity 66,729 50,599
---------- --------
Total liabilities and shareholders' equity $1,017,844 $851,380
========== ========
See Notes to Consolidated Financial Statements.
31
Consolidated Statements of Income
(Dollars in thousands, except per share data)
- -----------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans and leases $33,636 $47,215 $51,132
Mortgage-backed securities 16,929 13,935 10,461
Investment securities 2,451 2,890 4,115
Other 219 945 1,320
------ ------- ------
Total interest income 53,235 64,985 67,028
------ ------- ------
Interest expense:
Deposits 15,665 23,397 24,162
Short-term borrowings 1,172 1,759 4,707
Long-term debt 7,258 8,216 6,306
Capital securities 2,230 2,278 1,907
------ ------- ------
Total interest expense 26,325 35,650 37,082
------ ------- ------
Net interest income 26,910 29,335 29,946
Provision for loan and lease losses 3,814 7,116 4,416
------ ------- ------
Net interest income after provision for loan and lease losses 23,096 22,219 25,530
------ ------- ------
Non-interest income:
Service charges on deposits 3,685 2,616 2,236
Lease financing fees 218 751 1,433
Mutual fund, annuity and insurance commissions 2,781 3,094 4,605
Loan brokerage and advisory fees 1,142 1,319 2,193
Private equity fund management fees 247 2,457 2,235
Gain on sale of securities 655 2,819 533
Gain on sale of loan and lease receivables 701 975 667
Gain on sale of investments in unconsolidated entities 11 802 --
Gain on sale of real estate 1,646 -- --
Gain on sale of leasing division -- -- 1,686
Loss on extinguishment of debt (55) (301) --
Client warrant income (loss) 1,947 (1,948) 3,523
Equity (loss) in unconsolidated entities 88 (634) (2,791)
Other 2,253 3,860 3,222
------ ------- ------
Total non-interest income 15,319 15,810 19,542
------ ------- ------
Non-interest expense:
Salaries and employee benefits 16,025 19,159 20,180
Occupancy 2,591 2,541 2,302
Data processing 911 1,001 1,098
Professional services 2,528 3,662 2,466
Furniture, fixtures and equipment 2,071 2,234 2,147
Loan and real estate owned expenses, net 995 1,394 1,228
Goodwill and other intangible assets impairment losses and amortization 1,032 697 898
Other 5,997 6,597 6,080
------ ------- ------
Total non-interest expense 32,150 37,285 36,399
------ ------- ------
Income from continuing operations before income taxes 6,265 744 8,673
Income tax expense 2,269 200 3,016
------ ------- ------
Income from continuing operations 3,996 544 5,657
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) -- -- 123
------ ------- ------
Net income $3,996 $ 544 $7,299
====== ======= ======
Basic income, per common share, from continuing operations $.60 $.10 $ .98
Diluted income, per common share, from continuing operations .59 .10 .95
Basic earnings per common share .60 .10 1.26
Diluted earnings per common share .59 .10 1.22
Dividends per common share .10 .12 .21
Average common shares outstanding 6,658,880 5,599,358 5,793,607
Diluted average common shares outstanding 6,827,539 5,717,568 5,984,594
See Notes to Consolidated Financial Statements.
32
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income
(Dollars in thousands)
For the years ended December 31, 2002, 2001 and 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Unearned Net
Compensation Accumulated
Unearned Restricted Other
Common Treasury ESOP Stock Capital Retained Comprehensive
Stock Stock Shares Awards Surplus Earnings Income (Loss)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2000 $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)
Issuance of stock under employee benefit
plans (88,429 common shares;
13,506 ESOP shares) 89 107 12 415
Retirement of restricted stock awards
(1,694 common shares)(2) 20 (18)
Net income 3,996
Other comprehensive income, net of tax (a) 4,350
Net comprehensive income
Purchase of treasury stock
(50,000 treasury shares) (566)
Sale of treasury stock
(19,813 treasury shares) 144 39
Issuance of stock under private
placement (1,153,330 common shares) 1,153 7,071
Cash dividend declared (680)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $7,058 $(1,050) $(1,341) $(75) $51,536 $6,936 $3,665
===================================================================================================================================
For the years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------
Total
Comprehensive Shareholders'
Income Equity
- -------------------------------------------------------------------------------
Balance at January 1, 2000 $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
Issuance of stock under employee benefit
plans (88,429 common shares;
13,506 ESOP shares) 623
Retirement of restricted stock awards
(1,694 common shares)(2) --
Net income $3,996 3,996
Other comprehensive income, net of tax (a) 4,350 4,350
------
Net comprehensive income $8,346
======
Purchase of treasury stock
(50,000 treasury shares) (566)
Sale of treasury stock
(19,813 treasury shares) 183
Issuance of stock under private
placement (1,153,330 common shares) 8,224
Cash dividend declared (680)
- -------------------------------------------------- -----------
Balance at December 31, 2002 $66,729
================================================== ===========
(a) Calculation of other comprehensive income (loss) net of tax: 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Unrealized holding gains (losses) arising during the period, net of tax $4,782 $3,172 $(2,681)
Less: Reclassification adjustment for gains included in net income, net of tax 432 2,058 352
------ ------ -------
Other comprehensive income (loss), net of tax $4,350 $1,114 $(3,033)
====== ====== =======
See Notes to Consolidated Financial Statements.
33
Consolidated Statements of Cash Flows
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Income from continuing operations $ 3,996 $ 544 $ 5,657
Add (deduct) items not affecting cash flows from continuing operations:
Depreciation and amortization of premises and equipment, servicing rights
and deferred debt issuance costs 2,585 2,403 2,261
Impairment and amortization of goodwill and other intangible assets 1,032 697 898
Provision for loan and lease losses 3,814 7,116 4,416
Deferred income tax expense (benefit) 693 (1,587) (2,160)
Gain on sale of leasing division -- -- (1,686)
Gain on sale of loans and leases (701) (975) (667)
Gain on sale of securities available for sale (655) (2,819) (533)
Gain on sale of investments in unconsolidated entities (11) (802) --
Gain on sale of real estate (1,646) -- --
Accretion of deferred loan and lease fees and expenses (1,295) (2,138) (2,572)
Amortization of premiums/accretion of discounts and write-downs on securities 1,896 1,287 216
Client warrant (income) loss (1,947) 1,948 (3,523)
(Equity) loss in unconsolidated entities (88) 634 2,791
Other, net 367 57 297
Net proceeds from sales of trading securities -- -- 996
(Increase) decrease in accrued interest receivable (392) 1,074 (1,463)
(Increase) decrease in other assets 3,217 (3,191) 1,351
Increase (decrease) in other liabilities (856) (18,801) 11,820
Increase (decrease) in accrued interest payable 264 (2,324) 2,883
-------- --------- ---------
Net cash flows provided by (used in) continuing operations 10,273 (16,877) 20,982
Net cash flows used in discontinued operations -- -- (1,917)
-------- --------- ---------
Net cash flows provided by (used in) operating activities 10,273 (16,877) 19,065
Cash flows from investing activities:
Capital expenditures (4,672) (8,530) (5,012)
Purchases of investment and mortgage-backed securities available for sale (295,205) (227,407) (84,200)
Purchases of investment and mortgage-backed securities held to maturity (103,824) (1,301) (7,599)
Repayments on mortgage-backed securities available for sale 89,678 92,750 17,127
Repayments on mortgage-backed securities held to maturity 6,374 -- --
Proceeds from sales, maturities and calls of investment and mortgage-backed
securities available for sale 65,480 128,528 10,323
Proceeds from redemptions and calls of investment securities held to maturity 15,499 5,099 --
Proceeds from sale of investment in NewSeasons Assisted Living Communities
Series B and C preferred stock -- 1,792 --
Proceeds from sale of investments in unconsolidated entities 39 2,533 --
Proceeds from sale of loan and lease receivables 17,770 24,430 23,419
Net cash paid in sale of TechBanc (21,399) -- --
Proceeds from sale of AMIC division of PRA in 2001 and leasing division in 2000 -- 500 32,460
Net cash received in acquisition of banking offices -- 19,328 --
Investment in real estate owned (637) (1,188) (4,314)
Proceeds from sale of real estate owned 9,334 3,798 8,226
Proceeds from sale of discontinued teleservices operations -- -- 4,944
Net (increase) decrease in total loans and leases 13,449 (5,712) (99,318)
Net (investment in) distribution from unconsolidated entities 1,046 (313) (268)
Other, net (84) (125) (375)
-------- --------- ---------
Net cash flows provided by (used in) investing activities (207,152) 34,182 (104,587)
-------- --------- ---------
Cash flows from financing activities:
Net increase in demand, NOW and savings deposits 65,895 11,187 44,974
Net increase (decrease) in time deposits 42,340 (25,668) 51,130
Net increase (decrease) in short-term borrowings 77,541 (79,292) (407)
Proceeds from issuance of long-term debt 3,500 45,500 47,000
Early extinguishment of long-term debt -- (10,000) --
Repayments and calls and of long-term debt -- (10,000) (15,000)
Early extinguishment of subordinated debt (3,030) -- --
Proceeds from issuance of capital securities 15,000 -- 6,000
Early extinguishment of capital securities (6,275) -- --
Net proceeds from issuance of common stock in private placement 8,224 -- --
Net proceeds from issuance of common stock under employee benefit plans 441 279 296
Purchase of treasury stock (566) (1,105) (2,165)
Net proceeds from sale of treasury stock 183 -- --
Dividends paid (680) (677) (1,235)
-------- --------- ---------
Net cash flows provided by (used in) financing activities 202,573 (69,776) 130,593
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents 5,694 (52,471) 45,071
Cash and cash equivalents:
Beginning of year 32,526 84,997 39,926
-------- --------- ---------
End of year $ 38,220 $ 32,526 $ 84,997
======== ========= =========
34
Consolidated Statements of Cash Flows -- continued
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures:
Net conversion of loans receivable to real estate owned $ 3,326 $ 1,987 $ 5,696
Transfer of loans from portfolio to held for sale -- 25,587 --
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
Treasury shares issued in purchase of subsidiary -- -- 800
Cash payments for:
Income taxes for continuing operations $ 269 $ 4,776 $ 1,998
Income taxes for discontinued operations -- -- 759
Interest 26,173 37,841 34,080
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
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
future.
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.
35
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.
36
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; however, subsequent payments of interest on commercial
business loans can be recognized on a cash basis provided under management's
assessment that full collection of principal is expected and documented.
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 probable 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, Other Intangible Assets and Servicing Rights
Goodwill is the excess of the cost of an acquired entity over the net
of the amounts assigned to assets acquired and liabilities assumed based on fair
values. The amount recognized as goodwill includes acquired intangible assets
that do not meet the criteria in SFAS No. 141, "Business Combinations" for
recognition as assets apart from goodwill. An intangible asset is recognized as
an asset apart from goodwill if it arises from contractual or other legal rights
or if it is capable of being separated or divided from the acquired entity. In
finalizing an acquisition, 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 cost allocation accordingly based on such facts.
Goodwill and other identified intangible assets with indefinite useful lives are
no longer amortized effective January, 1, 2002, but are tested at least annually
for impairment or more often if events or circumstances indicate that there may
by impairment using specific guidance under SFAS No. 142 "Goodwill and Other
Intangible Assets". Goodwill is tested for impairment at the business segment
level and exists when the carrying amount of goodwill exceeds its implied fair
value. The carrying amount of the goodwill is reduced by the amount of the
recognized impairment loss. Intangible assets that have finite useful lives are
amortized over their useful lives, or the best estimate of their useful lives.
Servicing rights have been capitalized in accordance with SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities."
37
Treasury Stock
The Company accounts for treasury stock purchases at cost. Shares are
reissued on a FIFO (first-in-first-out) basis.
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, 2002, the
Company owned warrants on common stock in approximately 45 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 April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("FAS 145"). FAS 145 rescinds SFAS No. 4 "Reporting Gains and
Losses from Extinguishment of Debt" ("FAS 4") which required all gains and
losses from extinguishment of debt to be aggregated and, if material, classified
as an extraordinary item, net of related income tax effect. As a result of FAS
145, gains and losses from extinguishments of debt should be classified as
extraordinary items only if they meet the criteria of Accounting Principles
Board Opinion No. 30 "Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB 30"). The Board noted that the application of the criteria
in ABP 30 requiring the transactions to be both unusual in nature and infrequent
in occurrence would seldom, if ever, require that gains and losses from
extinguishment of debt be classified as extraordinary items. The provisions of
FAS 145 related to the rescission of FAS 4 are required to be applied in fiscal
years beginning after May 15, 2002, with early application encouraged. Any gain
or loss on extinguishment of debt that was classified as an extraordinary item
in prior periods that does not meet the criteria in APB 30 is required to be
reclassified. FAS 145 also rescinds an amendment to FAS 4, SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements" and rescinds
SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." FAS 145 makes
technical corrections to existing pronouncements which are not substantive in
nature. FAS 145 amends SFAS No. 13, "Accounting for Leases" ("FAS 13") to
require that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. The provisions of FAS 145 related to FAS 13 are
effective for transactions occurring after May 15, 2002, with early application
encouraged and all other provisions of FAS 145 are effective for financial
statements issued on or after May 15, 2002, with early application encouraged.
The Company adopted FAS 145 as of June 30, 2002 and has not experienced
any material changes to its financial position. In accordance with the
rescission of FAS 4, the Company has reclassified an extraordinary loss on the
extinguishment of debt previously reported in the results of operations for
2001. During December 2001, the Company used current cash on hand to prepay
$10.0 million in long-term FHLB Advances scheduled to mature in 2003. The
transaction was reported as a net extraordinary loss of $199,000 (loss of
$301,000 gross of a tax benefit of $102,000) or $.03 loss per share. The
transaction was part the Company's risk management strategy and does not meet
the criteria for classification as an extraordinary item in APB 30. Therefore,
for the restated results of operations for 2001, the loss of $301,000 on the
extinguishment of debt has been reclassified to non-interest income and the
$102,000 tax benefit has been reclassified to income tax expense.
38
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("FAS 146"). FAS 146 requires costs
associated with exit or disposal activities to be recognized when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by FAS 146 include lease termination costs and certain
employee severance costs that are associated with a restructuring, discontinued
operation, plant closing or other exit or disposal activity. FAS 146 nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)" ("Issue 94-3"). Under Issue 94-3, a
liability for an exit cost as defined in Issue 94-3 was recognized at the date
of an entity's commitment to an exit plan. FAS 146 improves financial reporting
by requiring that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value only when the
liability is incurred. FAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002, with early application
encouraged. The Company does not anticipate any material changes to its
financial position as a result of adopting FAS 146.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions" ("FAS 147"). FAS 147 removes acquisitions of financial
institutions, except transactions between two or more mutual enterprises, from
the scopes of both SFAS No. 72, "Accounting for Certain Acquisitions of Banking
and Thrift Institutions" and FASB Interpretations No. 9, "Applying APB Opinion
Nos. 16 and 17 When a Savings and Loan Association or Similar Institution is
Acquired in a Business Combination Accounted for by the Purchase Method" and
requires that those transactions be accounted for in accordance with SFAS No.
141 "Business Combinations" and SFAS 142, "Goodwill and Other Intangible
Assets." FAS 147 amends FAS 144 to include within its scope long-term
customer-relationship intangibles of financial institutions. FAS 147 is
effective for acquisitions occurring on or after October 1, 2002, and for all
other provisions on October 1, 2002 with earlier application permitted. The
Company does not anticipate any changes to its financial position as a result of
adopting FAS 147.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure ("FAS 148"). This Statement
amends FASB Statement No. 123 ("FAS 123"), "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. Under FAS 123 which was issued in 1995, companies had a choice
whether to adopt the fair value based method of accounting for stock-based
compensation or remain with the intrinsic value based method prescribed under
APB Option No. 25, "Accounting for Stock Issued to Employees" ("APB 25") but
provide pro-forma disclosures as if the fair value based method was applied.
Under FAS 123, companies that adopted the fair value based method were required
to apply that method prospectively for only new stock option awards which
contributed to a "ramp-up" effect on stock-based compensation expense in the
first few years following adoption. FAS 148 was issued in response to a growing
number of companies recently adopting or announcing their intention to adopt the
fair value based method of accounting for stock-based employee compensation and
permits two methods of transition that eliminate the ramp-up effect and reflect
an entity's full complement of stock-based compensation expense immediately upon
adoption. In addition, FAS 148 amends the disclosure requirements of FAS 123 to
require prominent disclosure in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The transition guidance and
annual disclosure provision of FAS 148 are effective for fiscal years ending
after December 15, 2002, with earlier application permitted in certain
circumstances. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002. The Company chose the intrinsic value based method of
accounting for stock-based compensation under APB 25 and provides the pro-forma
disclosures based upon the fair value method required under FAS 123 and FAS 148.
See Critical Accounting Policies in the Managements Discussion and Analysis and
Footnote 20 Shareholders' Equity.
In November 2002, the FASB issued Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 is an interpretation of
SFAS No. 5 "Accounting for Contingencies", SFAS No. 57 "Related Party
Disclosures", and SFAS No. 107 "Disclosures about Fair Value of Financial
Instruments" and a rescission of FASB Interpretation No. 34 "Disclosure of
Indirect Guarantees of Indebtedness of Others". FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under that guarantee and
must disclose that information in its interim and annual financial statements.
This guidance does not apply to certain guarantee contracts, such as those
issued by insurance companies or for a lessee's residual value guarantee
embedded in a capital lease. The provisions related to recognizing a liability
at inception of the guarantee for the fair value of the guarantor's obligations
would not apply to product warranties or to guarantees accounted for as
derivatives. The initial recognition and initial measurement provisions apply on
a prospective basis to guarantees issued or modified after December 31, 2002,
regardless of the guarantor's fiscal year-end. The disclosure requirements are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company does not anticipate any material changes to its
financial position as a result of adopting FIN 45.
39
In January 2003, the FASB issued Interpretation 46, "Consolidation of
Variable Interest Entities," ("FIN 46") which an interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements" ("ARB 51"). The
primary objective of FIN 46 is to provide guidance on the identification of, and
financial reporting for, entities over which control is achieved through means
other than voting rights; such entities are known as variable-interest entities.
Although the FASB's initial focus was on special-purpose entities, the final
guidance applies to a wide range of entities. FIN 46 will be the guidance that
determines (1) whether consolidation is required under the "controlling
financial interest" model of ARB 51, or (b) other existing authoritative
guidance, or, alternatively, (2) whether the variable-interest model under FIN
46 should be used to account for existing and new entities. The Company does not
anticipate any material changes to its financial position as a result of
adopting FIN 46.
(3) Acquisitions
On January 3, 2000, the Company acquired KMR Management, Inc. ("KMR"),
a Pennsylvania based corporation which provided management consulting services
to companies that in transition or crisis. 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 tested annually
for impairment. An impairment of $573,000 was recognized in 2002.
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 brought the total number of Progress banking offices to 20, and
expanded 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
On May 19, 2000, the Company sold the assets of Procall Teleservices,
Inc., its business-to-business teleservices subsidiary. Under Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations," the
discontinued operations of Procall Teleservices, Inc. were separated from the
continued operations of the Company. 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.
Condensed results of discontinued operations for the twelve months
ended 2000 are as follows:
For the years ended December 31, 2000
------------------------------------------------------------
Non-interest income $1,558
Non-interest expense 1,405
------
Income (loss) before income tax 153
Income tax expense (benefit) 30
------
Net income (loss) $ 123
======
(5) Cash and Due from Other Financial Institutions
Progress Bank is required by the Federal Reserve Board to maintain
reserves principally based on deposits outstanding; such reserves are included
in cash and due from other financial institutions. At December 31, 2002 and
2001, required reserves were $299,000 and $495,000, 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.
40
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, 2002 Cost Gains Losses Value Value
- --------------------------------------------------------------------------------------------------------------
Available for Sale:
- --------------------------------------------------------------------------------------------------------------
Equity Investments $ 1,696 $ -- $ 11 $ 1,685 $ 1,685
U.S. Government Agencies 10,653 13 -- 10,666 10,666
Bank deposits 166 -- -- 166 166
Corporate bonds 8,034 198 556 7,676 7,676
Mortgage-backed securities 333,139 6,014 56 339,097 339,097
- --------------------------------------------------------------------------------------------------------------
Total available for sale securities $353,688 $ 6,225 $ 623 $359,290 $359,290
==============================================================================================================
Held to Maturity:
- --------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank Stock $ 8,401 $ -- $ -- $ 8,401 $ 8,401
U.S. Government Agencies 3,330 52 -- 3,382 3,330
Municipal bonds 34,805 736 190 35,351 34,805
Mortgage-backed securities 73,470 1,377 13 74,834 73,470
- --------------------------------------------------------------------------------------------------------------
Total held to maturity securities $120,006 $ 2,165 $ 203 $121,968 $120,006
==============================================================================================================
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 1,545
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
==============================================================================================================
Investment and mortgage-backed securities pledged as collateral for
FHLB borrowings amounted to $133.2 million and $104.0 million at December 31,
2002 and 2001, respectively. Investment securities pledged to the Federal
Reserve Bank for Small Business Administration loans amounted to $1.0 million at
both December 31, 2002 and 2001. Investment and mortgage-backed securities
pledged under agreements to repurchase in connection with borrowings amounted to
$86.9 million and $24.3 million at December 31, 2002 and 2001, respectively.
Investment and mortgage-backed securities pledged as collateral for public funds
amounted to $25.3 million and $15.1 million at December 31, 2002 and 2001,
respectively. Investment and mortgage-backed securities pledged to the Federal
Reserve Bank to secure borrowings and Treasury, Tax and Loan balances amounted
to $2.6 million and $1.2 million at December 31, 2002 and 2001, respectively.
Investment securities pledged as collateral for customers' letters of credit
amounted to $166,000 at December 31, 2002.
41
The amortized cost and estimated fair value of the Company's debt
securities at December 31, 2002 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, 2002 Cost Value
- ------------------------------------------------------------------------------------------
Available for Sale:
Due one year or less $ 8,833 $ 8,833
Due after one year through five years 8,105 8,315
Due five years through ten years -- --
Due after ten years 1,915 1,360
Mortgage-backed securities 333,139 339,097
- ------------------------------------------------------------------------------------------
Total debt securities available for sale $351,992 $357,605
==========================================================================================
Held to Maturity:
Due five years through ten years $ 785 $ 826
Due after ten years 37,350 37,907
Mortgage-backed securities 73,470 74,834
- ------------------------------------------------------------------------------------------
Total debt securities held to maturity $111,605 $113,567
==========================================================================================
Proceeds from sales of investment and mortgage-backed securities
available for sale were $63.9 million, $127.3 million and $4.9 million in 2002,
2001 and 2000, respectively. Proceeds from maturities and calls of investment
and mortgage-backed securities available for sale were $1.6 million, $1.2
million and $5.4 million in 2002, 2001 and 2000, respectively. Proceeds from
maturities and calls of investment securities held to maturity were $15.5
million in 2002 and $5.1 million in 2001.
Total realized gains in 2002, 2001 and 2000 on the sale of investment
and mortgage-backed securities classified as available for sale were $3.1
million, $2.9 million and $1.9 million, respectively. Total realized losses in
2001 and 2000 on the sale of investment and mortgage-backed securities
classified as available for sale were $2.3 million and $287,000, 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 were
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 $1.9 million and $1.1 million were recorded in
client warrant income during 2002 and 2000, respectively. Equity securities
available for sale were written down by $537,000 in 2002 and $452,000 in 2001,
due to impairments.
During 1999, the Company transferred $9.7 million in investment
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 $32,000, $48,000 and $64,000 at December 31, 2002, 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, 2002 and 2001 are
detailed below:
At December 31, 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Commercial business $ 83,994 $ 123,546
Commercial real estate 199,672 195,105
Construction (net of loans in process of $85,965 and $69,066, respectively) 87,728 77,380
Single-family residential real estate 26,870 26,518
Consumer loans 50,105 44,821
Lease financing 19,673 43,342
Unearned income (2,229) (5,770)
Allowance for loan and lease losses (6,463) (9,917)
- -----------------------------------------------------------------------------------------------------------------
Total loans and leases, net $ 459,350 $ 495,025
=================================================================================================================
42
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, 2002 and 2001:
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 Impaired Allowance for
Loan Losses Loan Losses Loans Loan Losses
- -----------------------------------------------------------------------------------------------------------------
At December 31, 2002
- -----------------------------------------------------------------------------------------------------------------
Commercial business(1) $ 7,512 $ -- $ 7,512 $ 1,304
Commercial real estate 270 -- 270 27
Construction -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
Total $ 7,782 $ -- $ 7,782 $ 1,331
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------
(1) Includes $600,000 of troubled debt restructurings
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, 2002, 2001 and 2000 was $12.1 million, $12.3
million and $3.8 million, respectively. Interest income recognized on impaired
loans totaled $364,000 for 2002, $538,000 for 2001 and $176,000 for 2000.
The Company is a lessor of equipment and machinery under agreements
expiring at various dates through the Year 2007. At December 31, 2002, the
components of lease financing are as follows:
2003 $11,431
2004 5,688
2005 1,922
2006 613
2007 19
----------------------------------------------------------------------
Total future minimum lease payments receivable
including estimated residual value of $664,000 19,673
Unearned income (2,229)
----------------------------------------------------------------------
Total lease financing receivables $17,444
======================================================================
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, 2002, 2001 and 2000, the Company was servicing loans,
including participations sold, in the amounts of $82.3 million, $106.8 million
and $219.5 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, 2002 2001 2000
-----------------------------------------------------------------------------------------------
Balances at beginning of year $8,845 $4,353 $6,225
Additional loans and leases granted 3,901 5,086 5,950
Repayments (9,123) (594) (7,822)
-----------------------------------------------------------------------------------------------
Balances at end of year $3,623 $8,845 $4,353
===============================================================================================
43
The following is a summary of the activity in the allowance for loans
and lease losses:
For the years ended December 31, 2002 2001 2000
-----------------------------------------------------------------------------------------------------
Balance at beginning of year $9,917 $7,407 $5,927
Provisions for loan and lease losses 3,814 7,116 4,416
Losses charged against the allowance (8,054) (5,299) (3,618)
Recoveries on charge-off loans 786 693 682
-----------------------------------------------------------------------------------------------------
Balance at end of year $6,463 $9,917 $7,407
=====================================================================================================
(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, 2002.
(9) Investments in Unconsolidated Entities
The Company owns approximately 36% of the Ben Franklin/Progress Capital
Fund, L.P. (the "Ben Franklin Fund"), which was formed on December 30, 1997, and
accounts for its investment under the equity method. The Company's investment in
the Ben Franklin Fund amounted to $988,000 and $1.9 million at December 31, 2002
and 2001, respectively.
During 2001, the Company sold its investments in: New Seasons Assisted
Living Communities Series "C" preferred stock for a gain of $708,000, included
in gains (losses) on sales of securities; Progress Development I L.P. for a loss
of $162,000, included in gain on sale of investments in unconsolidated entities;
and NewSpring Venture Fund, L.P. for a gain of $964,000 included in gain on sale
of investments in unconsolidated entities.
(10) Premises and Equipment
Land, office buildings and equipment, at cost, are summarized by major
classification:
----------------------------------------------------------------------------------------------------------------------
At December 31, Estimated Life 2002 2001
----------------------------------------------------------------------------------------------------------------------
Premises and Equipment Occupied by Company:
Land $ 5,347 $ 4,691
Buildings and leasehold improvements (40 years or lease term) 17,569 14,093
Furniture, fixtures and equipment (3-5 years) 9,940 10,527
----------------------------------------------------------------------------------------------------------------------
32,856 29,311
Accumulated depreciation (8,113) (6,620)
----------------------------------------------------------------------------------------------------------------------
Total premises and equipment occupied by Company 24,743 22,691
----------------------------------------------------------------------------------------------------------------------
Property Held for Lease:
Buildings and leasehold improvements (40 years or lease term) 2,273 3,816
Accumulated depreciation (290) (469)
----------------------------------------------------------------------------------------------------------------------
Total property held for lease 1,983 3,347
----------------------------------------------------------------------------------------------------------------------
Total premises and equipment, net $26,726 $26,038
======================================================================================================================
Depreciation expense for the years ended December 31, 2002, 2001 and
2000, was $2.5 million, $2.3 million and $2.2 million, respectively.
At December 31, 2002, 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, 2002, minimum
future non-cancelable rental payments under operating leases are as follows:
----------------------------------------------------------------------
Premises and Equipment Occupied by Company:
----------------------------------------------------------------------
2003 $1,271
2004 1,202
2005 1,066
2006 887
2007 707
----------------------------------------------------------------------
Total $5,133
======================================================================
Rental expense for the years ended December 31, 2002, 2001, and 2000
was $1.2 million, $1.8 million and $1.7 million, respectively.
44
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,
2002, minimum future non-cancelable rental payments to be received under
operating leases are as follows:
----------------------------------------------------------------------
Property Held for Lease:
----------------------------------------------------------------------
2003 $229
2004 229
2005 124
2006 --
----------------------------------------------------------------------
Total $582
======================================================================
(11) Other Assets
The following items are included in other assets:
At December 31, 2002 2001
-------------------------------------------------------------------
Accounts receivable $2,144 $ 5,418
Other real estate owned -- 1,533
Goodwill 857 1,974
Customer-related intangibles 308 --
Servicing rights 280 246
Other assets 1,503 1,657
-------------------------------------------------------------------
Total $5,092 $10,828
===================================================================
Goodwill, Servicing Rights and Other Intangible Assets
The Company adopted FAS 142 on January 1, 2002 at which time management
reviewed the Company's existing goodwill of approximately $2.0 million,
reclassified eligible intangible assets and ceased amortizing its goodwill. An
existing customer-related intangible asset of $655,000 at the Equipment Leasing
segment was reclassified out of goodwill; under FAS 109, additional goodwill of
$223,000 was created by this reclassification. The remaining goodwill at the
Banking and Other business segments was tested and no impairment loss was
recognized. Goodwill amortization at the Banking and Other business segments of
approximately $150,000, or $139,000 after tax, was not recognized in 2002 due to
the adoption of FAS 142. However, during the first quarter of 2002, there was a
reduction in key personnel in the Company's Other segment resulting in an
interim non-tax-deductible impairment loss of $27,000 based on the expected
present value of future cash flows. The Company performed its annual valuation
on the goodwill held in its Other segment which resulted in a non-tax-deductible
impairment loss of $547,000 during the third quarter of 2002. Management
reassessed the useful life of the Equipment Leasing segment goodwill which
resulted in a non-tax-deductible impairment loss of $111,000 based on the
remaining expected future cashflows. The future amortization of the
customer-related intangible at the Equipment Leasing segment was adjusted from a
remaining twelve-year straight-line schedule to an accelerated schedule based on
the remaining expected future cashflows. This schedule results in an
amortization of 80% of the asset by the end of 2003. The difference between the
schedules resulted in additional amortization expense of approximately $292,000
during 2002.
Changes in the carrying amounts of goodwill related to each business
segment for the year ended December 31, 2002 are presented below:
Equipment Other Total
Banking Leasing Segments Goodwill
- ----------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 468 $ 655 $ 851 $ 1,974
Reclassification of customer related intangible as
a result of adoption of FAS 142 -- (655) -- (655)
Creation of goodwill under FAS 109 related to the
adoption of FAS 142 -- 223 -- 223
Impairment losses recognized -- (111) (574) (685)
- ----------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 468 $ 112 $ 277 $ 857
================================================================================================================
45
The gross carrying amount, accumulated amortization and net carrying
amount for each of the Company's identified intangible assets and servicing
rights subject to amortization is presented below:
At December 31, 2002 2001
--------------------------------------------------------------------------------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
--------------------------------------------------------------------------------------------------------------
Customer-related intangible $ 655 $(347) $308 $ -- $ -- $ --
Servicing rights 427 (147) 280 331 (85) 246
--------------------------------------------------------------------------------------------------------------
Total $1,082 $(494) $588 $331 $ (85) $ 246
==============================================================================================================
The amortization expense on the Company's identified intangible asset
and servicing assets for the year ended December 31, 2002 was $409,000. The
estimated amortization expense on the Company's identified intangible asset and
servicing rights for each of the years ended December 31, 2003, 2004, 2005, 2006
and 2007 is $247,000, $142,000, $79,000, $52,000 and $38,000, respectively.
Servicing rights include $252,000 and $194,000 of SBA Loan servicing
rights at December 31, 2002 and 2001, respectively; and $28,000 and $52,000 of
originated mortgage servicing rights at December 31, 2002 and 2001,
respectively. At December 31, 2002, 2001 and 2000, the Company was servicing
loans, including participations sold, in the amounts of $82.3 million, $106.8
million and $219.5 million, respectively, for the benefit of others.
The following table summarizes the effects of adopting FAS 142 on net
income and earnings per share:
For the years ended December 31, 2002 2001 2000
------------------------------------------------------------------------------------------------------
Reported net income from continuing operations $3,996 $544 $5,657
Add back: Goodwill amortization, net -- 174 384
Add back: Change in customer-related intangible amortization 292 -- --
------ ---- ------
Adjusted net income from continuing operations $4,288 $718 $6,041
====== ==== ======
Basic earnings per common share from continuing operations:
Reported net income $ .60 $.10 $ .98
Goodwill amortization, net -- .03 .06
Change in customer-related intangible amortization .04 -- --
------ ---- ------
Adjusted net income from continuing operations $ .64 $.13 $ 1.04
====== ==== ======
Diluted earnings per common share from continuing operations:
Reported net income $ .59 $.10 $ .95
Goodwill amortization, net -- .03 .06
Change in customer-related intangible amortization .04 -- --
------ ---- ------
Adjusted net income from continuing operations $ .63 $.13 $ 1.01
====== ==== ======
(12) Other Long-Term Debt
Other long-term debt at December 31, 2002 and 2001 consist of the
following:
-------------------------------------------------------------------------
At December 31, 2002 2001
-------------------------------------------------------------------------
FHLB borrowings $120,500 $117,000
Securities sold under agreement to repurchase -- 19,000
Employee Stock Ownership Plan note payable 1,227 1,368
-------------------------------------------------------------------------
Total $121,727 $137,368
=========================================================================
At December 31, 2002 there were $59.0 million in fixed rate FHLB
long-term borrowings at rates ranging from 3.98% to 6.20%. At December 31, 2002
the Company had $61.5 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. At December 31,
2002, FHLB borrowings were secured by approximately $313.6 million in certain
investment and mortgage-backed securities and $194.5 million in certain mortgage
loans. At December 31, 2002 aggregate maturities of the FHLB borrowings were:
$71.0 million in 2005; $10.0 million in 2006; $3.5 million in 2007; $15.0
million in 2008; and $21.0 million in 2010. Of these borrowings $61.5 million
are callable at dates ranging from 2003 through 2005.
46
At December 31, 2002 there was a $1.2 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, 2002 these
requirements were met. During 2002, $141,000 of the ESOP note payable was
reclassified to short-term borrowings as its maturity become less than one year.
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 loss on the extinguishment of debt of $301,000.
(13) Subordinated Debt
In December 2002, the Company exercised its option to redeem the 12
units of $250,000 subordinated debt notes payable June 30, 2004 at a price of
101% of par. The transaction resulted in a loss on the extinguishment of debt of
$30,000.
(14) Capital Securities
In December 2002, the Company issued $5.0 million of variable rate
capital securities due January 7, 2033 (the "Capital Securities IV") in a
private offering managed by Credit Suisse First Boston. The current interest
rate is 4.76% (three-month LIBOR plus 3.35%, capped at 12.5% until January 7,
2008, the date on which the Company can call the capital securities). The
Capital Securities IV were issued by the Company's recently formed subsidiary,
Progress Capital Trust IV, a statutory business trust created under the laws of
Delaware. The Company is the owner of all of the preferred and common securities
of the Trust. The Trust issued $5.0 million of Capital Securities IV (and
together with the preferred and common securities of the Trust, the "Trust
Securities IV"), the proceeds from which were used by the Trust, along with the
Company's $155,000 capital contribution for the Common Securities, to acquire
$5.2 million aggregate principal amount of the Company's Junior Subordinated
Debentures due January 7, 2033 (the "Debentures"), which constitute the sole
assets of the Trust. The Company has fully, irrevocably and unconditionally
guaranteed all of the Trust's obligations under the Capital Securities IV. Net
proceeds from the sale of the securities will be used for general purposes,
including but not limited to, repurchases of the Company's common stock under
its existing stock repurchase program.
In November 2002, the Company issued $10.0 million of variable rate
capital securities due November 8, 2032 (the "Capital Securities III") in a
private offering managed by Trapeza CDO I, LLC. The current interest rate is
4.96% (three-month LIBOR plus 3.35%, capped at 12% until November 15, 2007, the
date on which the Company can call the capital securities). The Capital
Securities III were issued by the Company's subsidiary, Progress Capital Trust
III (the "Trust III"), a statutory business trust created under the laws of
Delaware. The Company is the owner of all of the common securities of the Trust
III (the "Common Securities"). The Trust III issued $10.0 million of variable
rate Capital Securities III (and together with the Common Securities, the "Trust
III Securities"), the proceeds from which were used by the Trust III along with
the Company's $310,000 capital contribution for the Common Securities, to
acquire $10.3 million aggregate principal amount of the Company's variable rate
Junior Subordinated Notes due November 8, 2032 (the "Notes"), which constitute
the sole assets of the Trust III. The Company has fully, irrevocably and
unconditionally guaranteed all of the Trust III's obligations under the Capital
Securities III. Net proceeds from the sale of the capital securities were used
for general purposes, including but not limited to, the retirement of the
subordinated debentures, retirement of previously issued capital securities and
for repurchases of the Company's common stock under its existing stock
repurchase program.
In July 2000, the Company issued 6,000 shares, or $6.0 million, of
11.445% trust preferred securities, $1,000 liquidation amount per security, due
July 19, 2030 (the "Capital Securities II"), in a private offering managed by
First Union Securities, Inc. The Capital Securities II represent undivided
beneficial interests in Progress Capital Trust II (the "Trust II"), a statutory
business trust created under the laws of Delaware, which was established by the
Company for the purpose of issuing the Capital Securities II. The Company has
fully, irrevocably and unconditionally guaranteed all of the Trust II's
obligations under the Capital Securities II. 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.
47
During 1997 the Company issued $15.0 million of 10.5% capital
securities due June 1, 2027 (the "Capital Securities"). The Capital Securities
were issued by the Company's recently formed subsidiary, Progress Capital Trust
I, a statutory business trust created under the laws of Delaware. The Company is
the owner of all of the common securities of the Trust (the "Common
Securities"). The Trust issued $15.0 million of 10.5% Capital Securities (and
together with the Common Securities, the "Trust Securities"), the proceeds from
which were used by the Trust, along with the Company's $464,000 capital
contribution for the Common Securities, to acquire $15.5 million aggregate
principal amount of the Company's 10.5% Junior Subordinated Deferrable Interest
Debentures due June 1, 2027 (the "Debentures"), which constitute the sole assets
of the Trust. The Company has, through the Declaration of Trust establishing the
Trust, Common Securities and Capital Securities Guarantee Agreements, the
Debentures and a related Indenture, taken together, fully irrevocably and
unconditionally guaranteed all of the Trust's obligations under the Trust
Securities. The Company contributed approximately $6.0 million of the net
proceeds to Progress Bank, to increase its regulatory capital ratios and support
the growth of the expanded lending operations. Net proceeds retained by the
Company were used for general purposes, including investments in other
subsidiaries and potential future acquisitions. During 2002, the Company retired
$6.3 million of the capital securities and recorded a loss on the extinguishment
of debt of $25,000.
(15) Income Taxes
Income tax expense, including tax expense on the gain on sale of
discontinued operation of $1.0 million in 2000 and tax expense on discontinued
operations of $30,000 in 2000, consisted of the following:
---------------------------------------------------------------------------------------------------
For the years ended December 31, 2002 2001 2000
---------------------------------------------------------------------------------------------------
Current:
Federal $1,191 $ 1,762 $ 5,716
State 237 25 525
Deferred:
Federal 823 (1,621) (2,104)
State (18) 34 (56)
---------------------------------------------------------------------------------------------------
Total income tax expense $2,269 $ 200 $ 4,081
===================================================================================================
The provision for income taxes differs from the statutory rate due to
the following:
---------------------------------------------------------------------------------------------------
For the years ended December 31, 2002 2001 2000
---------------------------------------------------------------------------------------------------
Tax at statutory rate $2,130 $253 $3,869
State tax, net of Federal effect 169 39 310
Interest on non-taxable loans and securities (372) (305) (260)
Non-deductible goodwill 233 65 65
Non-deductible expenses 81 102 101
Restricted stock and Employee Stock Ownership Plan 9 36 --
Other 19 10 (4)
---------------------------------------------------------------------------------------------------
Total income tax expense $2,269 $200 $4,081
===================================================================================================
48
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, 2002 and 2001 are presented below:
---------------------------------------------------------------------------------------
At December 31, 2002 2001
---------------------------------------------------------------------------------------
Deferred tax assets:
Provision for loan and lease losses $2,160 $3,377
Unrealized loss on securities available for sale -- 353
Goodwill 766 890
Other 431 219
---------------------------------------------------------------------------------------
Total deferred tax assets 3,357 4,839
---------------------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized gain on securities available for sale 1,888 --
Deferred loan and lease costs 526 849
Direct finance lease receivable 43 283
Depreciation and amortization (a) 646 241
Other 181 236
---------------------------------------------------------------------------------------
Total deferred tax liabilities 3,284 1,609
---------------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $ 73 $3,230
=======================================================================================
(a) Under the Job Creation and Worker Assistance Act of 2002, the Company
utilized the "bonus" depreciation allowance stipulating that 30% of
the cost of certain new property is deductible in the year the
property is placed in service.
A valuation allowance has not been provided at December 31, 2002 and
2001 since management believes it is more likely than not that the deferred tax
assets will be realized.
(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, 2002. 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, 2002 2001
-------------------------------------------------------------------------------------------------------------
Contract or Notional Amount
-------------------------------
Amounts representing credit risk:
Commitments to extend credit (including unused lines of credit) $197,404 $179,402
Commercial letters of credit, financial guarantees and other letters of credit 7,633 12,068
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.
49
(17) Risks and Uncertainties
At December 31, 2002, 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 a result of the
directors' breaches of fiduciary duty, awarding the plaintiff the costs and
disbursements of the actions, including expenses of the lawsuit and granting
such other and further relief as the Court may deem just and proper. The Company
believes that this action is without merit and is defending the action
vigorously. On December 7, 2001, the Company filed an Opening Brief and Motion
to Dismiss the Complaint, which the plaintiff filed an opposition to on January
25, 2002. On March 8, 2002, the Company filed a Reply Brief in support of its
motion to dismiss. Oral argument was held on April 24, 2002. The Company is
awaiting a ruling on its motion.
(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, 2002, 2001 and 2000, the Company recorded management fees
from Ben Franklin of $136,000, $272,000 and $272,000, respectively. Management
fees from other unconsolidated entities were $112,000, $2.2 million and $2.0
million during 2002, 2001 and 2000, respectively. Ben Franklin had a certificate
of deposit with the Bank that totaled $940,000 at December 31, 2001 which
matured in January 2002. Ben Franklin has a transaction account with the Bank
that totaled $5,000 at both December 31, 2002 and 2001.
Loans and lease receivables from executive officers and directors,
including loans and leases to related persons and entities, and affiliates can
be found under Footnote 7 "Loans and Leases, Net."
(19) 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 $245,000, $306,000 and $359,000 for
the years 2002, 2001 and 2000, respectively.
(20) 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 required the Bank to (i) reduce its lending to
early stage technology companies; (ii) increase its leverage capital ratio to no
less than 8.0% and its total risk-basked capital ratio to no less than 14.0% by
April 1, 2002 through gradual compliance; and (iii) increase its valuation
allowance and implement improved credit review and monitoring programs. In
addition, the Company could not pay cash dividends on its capital stock until
the Bank achieved the required capital levels and had implemented an acceptable
capital plan. As such, the Company had suspended the quarterly cash dividend on
its common stock and its stock repurchase program and had undertaken measures to
achieve capital compliance as promptly as possible. The increased capital levels
reflect the Bank's level of business lending, particularly in the technology
sector, and continued economic concerns.
On February 7, 2002 the OTS approved the Company's revised Capital
Enhancement Plan and on June 25, 2002 the OTS agreed to extend the dates by
which the Bank must comply with the targeted ratio of classified assets to
capital. As revised, the Bank's classified assets to capital ratio could not
exceed 25% on September 30, 2002 and could not exceed 20% on March 31, 2003. The
Bank worked aggressively to reduce the ratio and comply with the terms of the
directive. The Company achieved the required capital levels at the Bank and both
the Company and the Bank are in full compliance with the OTS approved capital
plan.
On July 30, 2002, the Company reinstated its quarterly cash dividend on
its common stock. On October 23, 2002, the OTS released the Company and Progress
Bank from the Supervisory Directive and the Individual Minimum Capital
Directive.
50
Common Stock Offerings and Repurchase Programs
On February 11, 2002, the Company closed a private placement offering
of common stock to accredited investors of 1,153,330 common shares priced at
$7.50 a share, totaling $8.6 million, resulting in net proceeds of approximately
$8.2 million.
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 147,500 and 2,300 shares were
repurchased during 2001 and 2000, respectively. As discussed above, repurchases
were suspended from June 30, 2001 until the Bank has achieved capital compliance
under the OTS directive. On October 23, 2002, the Company reinstated its stock
repurchase program for the repurchase of up to 200,000 shares, or three percent,
of the Company's outstanding common stock, of which 50,000 shares were
repurchased during 2002.
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 $127,000,
$50,000 and $165,000 for 2002, 2001 and 2000, respectively. Interest expense on
the borrowings was $108,000, $58,000 and $3,000 for 2002, 2001 and 2000,
respectively.
Employee Stock Purchase Plan
Under the Company's 1996 Employee Stock Purchase Plan, amended in 2002,
("ESPP") 321,551 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 2002, 2001 and 2000, 26,995, 40,309
and 25,451 shares, respectively, were issued to employees through their
participation in the ESPP. These transactions increased shareholders' equity by
$192,000, $273,000 and $288,000 during 2002, 2001 and 2000, respectively. At
December 31, 2002 187,255 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 2002, 2001 and 2000, the Company awarded
1,600 shares at $11.20 per share, 2,000 shares at $7.06 per share, and 1,512
shares at $11.90 per share, respectively. Retirements during 2002, 2001 and 2000
amounted to 1,694, 40,352 and 84 shares, respectively. During 2001, 39,310 of
the 40,352 retired shares of common stock were cancelled from the plan. During
2002, 2001 and 2000, 2,808, 18,370 and 16,346 shares vested, respectively. At
December 31, 2002 there were 7,188 unvested shares with an average issuance
price of $10.42 per share and a weighted average contractual remaining life of
2.5 years and 1,421 shares remaining for issuance. The Company accrued $23,000,
$80,000 and $213,000 in compensation expense relating to the awards in 2002,
2001 and 2000, 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 52,740 shares
remained for future grants at December 31, 2002. All options were granted at the
fair market value and have a one- to five-year vesting period.
51
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, 2002, 3,638 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 the greater of the par value or the fair market value of a share of Common
Stock on the date the option is granted. Under this plan, 210,000 shares of
common stock were reserved for issuance; of which 42,793 shares remained for
future grants at December 31, 2002. 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, 2002, 2001 and 2000 and changes during the
years ended on those dates is presented below:
Weighted Average
For the year ended December 31, 2002 Shares Under Option Exercise Price
--------------------------------------------------------------------------------------------
Outstanding at beginning of year 802,686 $7.8596
Granted during year 82,114 8.2993
Exercised during year (59,834) 4.1649
Forfeited during year (63,515) 10.3914
--------------------------------------------------------------------------------------------
Outstanding at end of year 761,451 7.9861
============================================================================================
Options exercisable at end of year 604,488 $7.7632
============================================================================================
For the year ended December 31, 2001
--------------------------------------------------------------------------------------------
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
============================================================================================
The following table summarizes information about fixed stock options at
December 31, 2002:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------- -------------------------------
Weighted Average Weighted Number of Weighted
Range of Exercise Number of Remaining Average Shares Average
Prices Shares Contractual Life Exercise Price Exercisable Exercise Price
--------------------- -------------------------------------------------- -------------------------------
$ 2.88 -- 4.00 104,907 0.7 $ 3.0426 104,907 $ 3.0426
4.01 -- 7.00 233,335 4.1 6.1993 223,685 6.1911
7.01 -- 10.00 204,841 8.5 7.9238 93,530 7.8861
10.01 -- 13.00 187,202 6.8 11.8943 154,673 11.8879
13.01 -- 15.66 31,166 5.4 14.9396 27,693 14.8902
--------------------- -------------------------------------------------- -------------------------------
$ 2.88 -- 15.66 761,451 5.5 $ 7.9861 604,488 $ 7.7632
===================== ================================================== ===============================
52
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, 2002, 2001 and 2000 would have been reduced to the pro forma
amounts indicated below:
- -----------------------------------------------------------------------------------------------------
For the year ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------
Income from Continuing Operations:
As reported $3,996 $544 $5,657
Pro forma 3,744 122 5,185
Basic income from continuing operations
per common share:
As reported .60 .10 .98
Pro forma .56 .02 .89
Diluted income from continuing operations
per common share:
As reported .59 .10 .95
Pro forma .55 .02 .87
Net income:
As reported 3,996 544 7,299
Pro forma 3,744 122 6,827
Basic earnings per share:
As reported .60 .10 1.26
Pro forma .56 .02 1.18
Diluted earnings per share:
As reported .59 .10 1.22
Pro forma .55 .02 1.14
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 2002, 2001 and 2000, dividend yield of 0.03%,
2.59% and 1.69%; expected volatility of 25.08%, 39.03% and 28.01%; risk free
interest rate of 4.77%, 4.95% and 6.51%; and an expected holding period of 8.89
years, 8.88 years and 8.84 years, respectively. The weighted average fair value
per share of options granted during 2002, 2001 and 2000 was $3.69, $3.07 and
$4.75, respectively.
Earnings Per Share
The following table presents a summary of per share data and the
amounts for the periods included:
Per Share
For the year ended December 31, 2002 Income Shares Amount
- --------------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Income available to common shareholders $3,996 6,658,880 $.60
====
Effect of Dilutive Securities:
Options -- 168,659 --
---------
Diluted Earnings Per Share:
Total income from available to common shareholders and assumed
conversions $3,996 6,827,539 $.59
====== ========= ====
53
Per Share
For the year ended December 31, 2002 Income Shares Amount
- --------------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Income available to common shareholders $544 5,599,358 $.10
====
Effect of Dilutive Securities:
Options -- 118,210 --
---------
Diluted Earnings Per Share:
Total income available to common shareholders and assumed
conversions $544 5,717,568 $.10
==== ========= ====
For the year ended December 31, 2000
- --------------------------------------------------------------------------------------------------------
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:
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
====== ========= =====
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.
At December 31, 2002 and 2001, the Bank's tangible equity ratio was
7.80% and 7.88%, Tier 1 leverage capital ratio was 7.82% and 7.90%, Tier 1
risk-based capital ratio was 14.09% and 11.60% and total risk-based capital
ratio was 15.20% and 12.85%, respectively. These ratios were based on tangible
equity of $77.6 million and $66.2 million, Tier 1 leverage capital of $77.9
million and $66.4 million, Tier 1 risk-based capital of $77.9 million and $66.4
million and total risk-based capital of $84.0 million and $73.6 million,
respectively. In addition these ratios were based on adjusted total assets
$995.0 million and $840.3 million for the tangible equity ratio and $995.3
million and $840.3 million for Tier 1 leverage ratio, and risk-weighted assets
of $552.9 million and $572.6 million at December 31, 2002 and 2001,
respectively. As of December 31, 2002, the Bank is classified as "well
capitalized."
54
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, 2002 and 2001:
- -------------------------------------------------------------------------------------------------------------
Tier 1 or Tier 1 Total
Tangible Leverage Risk-Based Risk-Based
At December 31, 2002 Equity Capital Capital Capital
- -------------------------------------------------------------------------------------------------------------
Total qualifying capital $77,627 $77,879 $77,879 $84,028
Capital ratio 7.80% 7.82% 14.09% 15.20%
Minimum capital adequacy requirement $19,900 $39,811 $22,117 $44,233
Minimum capital adequacy ratio 2.00% 4.00% 4.00% 8.00%
Regulatory capital excess $57,727 $38,068 $55,762 $39,795
- -------------------------------------------------------------------------------------------------------------
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
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 suspended the quarterly cash dividend on its common stock
during the second half of 2001 and the first half of 2002. The Company paid cash
dividends of $.12 per share during 2001 prior to the OTS directive and paid cash
dividend of $.10 during 2002 after the OTS released the directive.
(21) 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, 2002 and 2001:
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.
Investments and mortgage-backed securities: Fair values for investments
and mortgage-backed securities were based on current quoted market
prices.
Loans, excluding leases: For variable rate loans that reprice
frequently and have no significant credit risk, fair values are based
on carrying values. The estimated fair values for certain mortgage
loans (e.g., one- to- four-family residential) and other consumer loans
are based on quoted market prices of similar loans sold in conjunction
with securitization transactions. The fair value of non-accruing 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.
55
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, 2002 and 2001
(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.
Capital securities: Fair value of capital securities is estimated using
a discounted cash flow calculation that uses current borrowing rates
for instruments 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, 2002 2001
- -----------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------------------------------------------------
Financial assets:
Cash and due from other financial institutions $ 38,220 $ 38,220 $ 32,526 $ 32,526
Investments and mortgage-backed securities 479,296 481,258 250,001 249,848
Loans, excluding lease receivables(1) 448,369 464,021 492,957 505,076
Accrued interest receivable 4,804 4,804 4,551 4,551
Servicing rights 280 280 246 246
Financial liabilities:
Deposits $691,538 $686,179 $629,523 $626,406
Short-term borrowings 96,882 97,223 200 200
Long-term and subordinated debt 121,727 132,957 140,368 146,341
Capital securities 28,836 32,132 20,260 23,470
Accrued interest payable 3,554 3,554 3,526 3,526
(1) Includes loans held for sale
56
(22) Subsequent Event
On February 24, 2003, the Company announced the addition of Frank A.
Farnesi, CPA to its Board of Directors.
On February 26, 2003, the Company announced the completion of its
repurchase of 200,000 shares of common stock under its previously announced
repurchase program and the authorization of a new repurchase program by the
Company's Board of Directors to repurchase up to 335,000 shares, or five percent
of the Company's outstanding common stock.
(23) Condensed Financial Information of Progress Financial Corporation
(Parent Company Only)
Condensed Statements of Financial Condition
- -------------------------------------------------------------------------------
At December 31, 2002 2001
- -------------------------------------------------------------------------------
Assets:
Cash on deposit with subsidiary $ 3 $ --
Interest-earning deposits 21 1
Investment in Bank 82,438 66,833
Investment in non-bank subsidiaries 5,427 6,595
Investment in unconsolidated entities 109 110
Investments available for sale 8,657 1,770
Loans and advances to subsidiaries 193 296
Other assets 616 684
------- -------
Total assets $97,464 $76,289
======= =======
Liabilities and shareholders' equity:
Liabilities:
Subordinated debt $ -- $ 3,000
Capital securities 28,836 20,260
Employee Stock Ownership Plan note payable 1,342 1,475
Accounts payable to subsidiaries 26 417
Other liabilities 531 538
------- -------
Total liabilities 30,735 25,690
Shareholders' equity:
Serial preferred stock -- --
Common stock 7,058 5,818
Treasury stock (1,050) (628)
Unearned Employee Stock Ownership Plan shares (1,341) (1,448)
Unearned compensation--restricted stock awards (75) (107)
Capital surplus 51,536 44,029
Retained earnings 6,936 3,620
Net accumulated other comprehensive income (loss) 3,665 (685)
------- -------
Total shareholders' equity 66,729 50,599
------- -------
Total liabilities and shareholders' equity $97,464 $76,289
======= =======
57
Condensed Statements of Operations
For the years ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Management fees from subsidiaries $ 543 $ 346 $1,055
Investment advisory fees -- 24 24
Equity in undistributed income of subsidiaries 6,100 2,719 7,719
Equity in unconsolidated entities 6 19 --
Loss on extinguishment of debt (55) -- --
Loss of sale investments in unconsolidated entities -- (5) --
Miscellaneous income 7 85 --
Interest income 92 23 24
------- ------- ------
Total income 6,693 3,211 8,822
------- ------- ------
Interest expense 2,585 2,584 2,161
Professional services 174 143 99
Management fee to Bank 888 955 1,854
Miscellaneous expense 105 88 147
------- ------- ------
Total expense 3,752 3,770 4,261
------- ------- ------
Income (loss) from continuing operations before income taxes 2,941 (559) 4,561
Income tax benefit (1,055) (1,103) (1,058)
------- ------- ------
Income from continuing operations 3,996 544 5,619
Income from discontinued operations (net of tax of $--, $--and $189) -- -- 1,680
------- ------- ------
Net income $ 3,996 $ 544 $7,299
======= ======= ======
Condensed Statements of Cash Flows
For the years ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Income from continuing operations $ 3,996 $ 544 $5,619
Add(deduct) items not affecting cash flows from continuing operations:
Equity in income of subsidiaries (6,100) (2,719) (7,719)
Equity in unconsolidated entities (6) (19) --
Loss from extinguishment of debt 55 -- --
Amortization 85 62 69
Net (increase) decrease in accounts receivable and other assets 140 (402) 4,299
Net decrease in accounts payable and other liabilities (444) (918) (5,211)
------- ------- ------
Net cashflows used in continuing operations (2,274) (3,452) (2,943)
Net cash flows provided by discontinued operations -- -- 2,776
------- ------- ------
Net cash flows used in operating activities (2,274) (3,452) (167)
------- ------- ------
Cash flows from investment activities:
Capital contributions and additional investment in subsidiaries (4,525) (3,800) (5,885)
Dividends and cash distributions from subsidiaries 538 8,712 2,601
Investments in unconsolidated entities -- (93) --
Cash distributions from unconsolidated entities 7 8 --
Proceeds from sales of investments available for sale 1,770 524 1,107
Purchases of investments available for sale (8,657) (1,770) (524)
Purchase of Company owned life insurance -- (125) (125)
------- ------- ------
Net cash flows used in investment activities (10,867) 3,456 (2,826)
------- ------- ------
Cash flows from financing activities:
Proceeds from issuance of capital securities 15,000 -- 6,000
Early extinguishment of capital securities (6,275) -- --
Early extinguishment of subordinated debt (3,030) -- --
Proceeds from issuance of ESOP debt -- 1,500 --
Repayment of ESOP debt (133) (25) (74)
Purchase of treasury stock (566) (1,105) (2,165)
Net proceeds from sale of treasury stock 183 -- --
Net proceeds from issuance of common stock 8,224 -- --
Net proceeds from issuance of common stock under employee benefit plans 441 279 296
Dividends paid (680) (677) (1,235)
------- ------- ------
Net cash flows provided by (used in) financing activities 13,164 (28) 2,822
------- ------- ------
Net increase (decrease) in cash and cash equivalents 23 (24) (171)
Cash and cash equivalents:
Beginning of year 1 25 196
------- ------- ------
End of year $ 24 $ 1 $ 25
======= ======= ======
These statements should be read in conjunction with the other notes to
the consolidated financial statements.
58
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP
One South Market Square
Harrisburg PA 17101-9916
Telephone (717) 231-5900
Facsimile (717) 232-5672
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, changes in shareholders' equity and
comprehensive income, and cash flows present fairly, in all material respects,
the financial position of Progress Financial Corporation and its subsidiaries at
December 31, 2002 and December 31, 2001, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
2002 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.
/s/ PricewaterhouseCoopers LLP
January 21, 2003
59
[GRAPHIC OMITTED]
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 Committee 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 LLP; 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 LLP, 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 LLP 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
January 21, 2003
60
[GRAPHIC OMITTED]
January 8, 2003
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, 2002 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, 2002. 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,
2002.
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,
2002.
/s/ W. Kirk Wycoff
W. Kirk Wycoff, Chief Executive Officer
/s/ Michael B. High
Michael B. High, Chief Operating Officer
and Chief Financial Officer
61
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP
One South Market Square
Harrisburg PA 17101-9916
Telephone (717) 231-5900
Facsimile (717) 232-5672
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, that Progress Bank
maintained effective internal control over financial reporting as of December
31, 2002, based on criteria established in "Internal Control -- Integrated
Framework" issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). 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 maintained effective
internal control over financial reporting as of December 31, 2002 is fairly
stated, in all material respects, based upon criteria established in "Internal
Control -- Integrated Framework" issued by COSO.
/s/ PricewaterhouseCoopers LLP
January 21, 2003
62
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 2002 classifications.
Dec. 31, Sept. 30, Jun. 30, Mar. 31, Dec. 31, Sept. 30, Jun. 30, Mar. 31,
2002 2002 2002 2002 2001 2001 2001 2001
- -------------------------------------------------------------------------------------------------------------------------------
Interest income $13,276 $13,473 $13,474 $13,012 $14,451 $16,330 $16,906 $17,298
Interest expense 6,447 6,653 6,581 6,644 7,618 8,808 9,484 9,740
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 6,829 6,820 6,893 6,368 6,833 7,522 7,422 7,558
Provision for loan and lease losses 875 500 1,000 1,439 972 1,543 3,554 1,047
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan and lease losses 5,954 6,320 5,893 4,929 5,861 5,979 3,868 6,511
Non-interest income 3,208 4,351 3,216 4,544 5,215 4,252 3,285 3,058
Non-interest expense 7,737 8,290 7,767 8,356 10,238 8,835 9,253 8,959
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,425 2,381 1,342 1,117 838 1,396 (2,100) 610
Income tax expense 401 1,066 435 367 283 463 (731) 185
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,024 $ 1,315 $ 907 $ 750 $ 555 $ 933 $(1,369) $ 425
===============================================================================================================================
Basic net income per common share .15 .20 .13 .12 .10 .17 (.24) .07
Diluted net income per common share .15 .19 .13 .12 .10 .17 (.24) .07
Dividends per share .05 .05 -- -- -- -- .06 .06
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 2003 Annual Meeting to be held
April 22, 2003 (the "Proxy Statement") is incorporated herein by reference.
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.
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.
Item 14. Controls and Procedures
Management, under the supervision and with the participation
of the Company's President and Chief Executive Officer (the "CEO") and the
Company's Chief Operating Officer and Chief Financial Officer (the "COO/CFO")
have evaluated the Company's disclosure controls and procedures within 90 days
prior to the filing of this report. Based upon that evaluation, the CEO and the
COO/CFO have concluded that the disclosure controls and procedures were
effective. There were no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of the evaluation.
63
PART IV
Item 15. 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, filed with the SEC on March 29,
1999)
4 Instruments defining the rights of security holders, including
indentures (The Company has no instruments defining the rights of
holders of its long-term debt where the amount of securities
authorized under such instrument exceeds 10% of the total assets of
the Company and its subsidiaries on a consolidated basis. The Company
hereby agrees to furnish a copy of any indenture that it is a party
to the SEC upon request.)
*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 July 23, 2002. (Exhibit 10. to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2002, filed with the SEC on August 13, 2002) **
*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) **
*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 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) **
*10.8 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) **
64
No. Exhibits (Continued)
--- --------------------
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants for Progress Financial Corporation
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
* Incorporated by reference.
** Management compensation plan or arrangement
c. Reports on Form 8-K filed for the quarter ended December 31, 2002:
1. On October 22, 2002, the Company filed a Current Report under Item 5
announcing the Third Quarter 2002 earnings and the distribution of an
earnings package to analysts.
2. On October 23, 2002, the Company filed a Current Report under Item 5
announcing the declaration of its quarterly cash dividend.
3. On October 23, 2002, the Company filed a Current Report under Item 5
announcing the authorized reinstatement of the repurchase program for the
repurchase of up to 200,000 shares, or three percent, of the Company's
outstanding common stock.
4. On October 28, 2002, the Company filed a Current Report under Item 5
announcing Compliance and release from the OTS Supervisory Directive,
dated July 3, 2001 and the Individual Minimum Capital Directive, dated
September 20, 2001.
5. On November 13, 2002, the Company filed a Current Report under Item 5
announcing the issuance of 10,000 shares of Trust Preferred Securities
(Trust III).
6. On December 24, 2002, the Company filed a Current Report under Item 5
announcing the issuance of 5,000 shares of Trust Preferred Securities
(Trust IV).
65
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 12, 2003 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 12, 2003
- -------------------------------------- --------------
W. Kirk Wycoff, Chairman, President Date
and Chief Executive Officer
/s/ John E. F. Corson March 12, 2003
- -------------------------------------- --------------
John E. Flynn Corson, Director Date
/s/ William O. Daggett, Jr. March 12, 2003
- -------------------------------------- --------------
William O. Daggett, Jr., Director Date
/s/ Frank A. Farnesi March 12, 2003
- -------------------------------------- --------------
Frank A. Farnesi, Director Date
/s/ G. Daniel Jones March 12, 2003
- -------------------------------------- --------------
G. Daniel Jones, Director Date
/s/ Joseph R. Klinger March 12, 2003
- -------------------------------------- --------------
Joseph R. Klinger, Director Date
/s/ Paul M. LaNoce March 12, 2003
- -------------------------------------- --------------
Paul M. LaNoce, Director Date
/s/ A. John May March 12, 2003
- -------------------------------------- --------------
A. John May, III, Director Date
/s/ William L. Mueller March 12, 2003
- -------------------------------------- --------------
William L. Mueller, Director Date
/s/ Kevin J. Silverang March 12, 2003
- -------------------------------------- --------------
Kevin J. Silverang, Director Date
/s/ Charles J. Tornetta March 12, 2003
- -------------------------------------- --------------
Charles J. Tornetta, Director Date
/s/ Stephen T. Zarrilli March 12, 2003
- -------------------------------------- --------------
Stephen T. Zarrilli, Director Date
/s/ Michael B. High March 12, 2003
- -------------------------------------- --------------
Michael B. High, Chief Financial Officer Date
and Chief Operating Officer
66
CERTIFICATION
I, W. Kirk Wycoff, President and Chief Executive Officer of Progress Financial
Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of Progress Financial
Corporation (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 12, 2003
/s/ W. Kirk Wycoff
--------------------------------------------
Name: W. Kirk Wycoff
Title: President and Chief Executive Officer
67
CERTIFICATION
I, Michael B. High, Chief Operating Officer and Chief Financial Officer of
Progress Financial Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of Progress Financial
Corporation (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 12, 2003
/s/ Michael B. High
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Name: Michael B. High
Title: Chief Operating Officer and
Chief Financial Officer
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