Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarter ended March 31, 2002.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _________ to ___________________.
Commission File Number: 0-14815
Progress Financial Corporation
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2413363
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4 Sentry Parkway
Suite 200
Blue Bell, Pennsylvania 19422
- ----------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 825-8800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock ($1.00 par value) 6,798,416
- ------------------------------ -------------------------------------------------
Title of Each Class Number of Shares Outstanding as of April 30, 2002
Progress Financial Corporation
Table of Contents
PART I - Interim Financial Information
Page
Item 1. Interim Financial Statements (Unaudited)
Consolidated Interim Statements of Financial Condition as of
March 31, 2002 and December 31, 2001................................3
Consolidated Interim Statements of Operations for the
three months ended March 31, 2002 and 2001..........................4
Consolidated Interim Statements of Changes in Shareholders'
Equity and Comprehensive Income for the three months
ended March 31, 2002 and 2001.......................................5
Consolidated Interim Statements of Cash Flows for the
three months ended March 31, 2002 and 2001..........................6
Notes to Consolidated Interim Financial Statements..................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........14
PART II - Other Information
Item 1. Legal Proceedings..................................................14
Item 2. Changes in Securities..............................................14
Item 3. Defaults upon Senior Securities....................................14
Item 4. Submission of Matters to a Vote of Security Holders................15
Item 5. Other Information..................................................15
Item 6. Exhibits and Reports on Form 8-K...................................15
Signatures.........................................................16
PART I- INTERIM FINANCIAL INFORMATION
Item 1. Interim Financial Statements
Consolidated Interim Statements of Financial Condition (Unaudited)
(Dollars in thousands)
March 31, December 31,
2002 2001
---------------- -----------
Assets
Cash and due from banks:
Non-interest-earning $ 11,906 $21,250
Interest-earning 12,130 11,276
Investment and mortgage-backed securities [Note 5]:
Available for sale at fair value (amortized cost: $271,705, and $212,793) 269,849 211,828
Held to maturity at amortized cost (fair value: $63,612, and $38,020) 64,874 38,173
Loans and leases, net [Note 6] (net of reserves[Note 7]: $8,775 and $9,917) 469,173 495,025
Loans held for sale [Note 8] -- 25,587
Investments in unconsolidated entities 2,056 1,985
Premises and equipment, net 25,704 26,038
Other assets 19,287 20,218
-------- --------
Total assets $874,979 $851,380
======== ========
Liabilities, Capital Securities and Shareholders' Equity
Liabilities:
Deposits [Note 8]:
Non-interest-bearing $ 72,567 $ 84,783
Interest-bearing 546,240 544,740
Short-term borrowings:
Securities sold under agreement to repurchase 31,100 --
Other short-term borrowings 645 200
Other liabilities 13,498 10,430
Long-term debt:
Federal Home Loan Bank advances 117,000 117,000
Other debt 11,342 20,368
Subordinated debt 3,000 3,000
-------- --------
Total liabilities 795,392 780,521
-------- --------
Corporation-obligated mandatorily redeemable capital securities of subsidiary trust
holding solely junior subordinated debentures of the Corporation [Note 9] 20,267 20,260
Commitments and contingencies [Note 10]
Shareholders' equity [Note 4]:
Serial preferred stock - $.01 par value;1,000,000 shares authorized but unissued -- --
Junior participating preferred stock - $.01 par value; 1,010 shares authorized but -- --
unissued
Common stock - $1 par value; 12,000,000 shares authorized: 7,034,000 and
5,818,000 shares issued and outstanding; including treasury shares
of 84,000 and 84,000 and unallocated shares held by the Employee
Stock Ownership Plan of
182,000 and 182,000 7,034 5,818
Other common shareholders' equity, net 53,555 45,466
Net accumulated other comprehensive loss (1,269) (685)
-------- --------
Total shareholders' equity 59,320 50,599
-------- --------
Total liabilities, capital securities and shareholders' equity $874,979 $851,380
======== ========
See Notes to Consolidated Interim Financial Statements.
Consolidated Interim Statements of Operations (Unaudited)
(Dollars in thousands, except per share data)
For the Three Months
Ended March 31,
2002 2001
------ ------
Interest income:
Loans and leases, including fees $8,950 $12,675
Mortgage-backed securities 3,370 3,277
Investment securities 606 990
Other 86 356
------ -------
Total interest income 13,012 17,298
------ -------
Interest expense:
Deposits 4,021 6,666
Short-term borrowings 103 647
Long-term and subordinated debt 1,948 1,866
------ -------
Total interest expense 6,072 9,179
------ -------
Net interest income 6,940 8,119
Provision for loan and lease losses 1,439 1,047
------ -------
Net interest income after provision for loan and lease losses 5,501 7,072
------ -------
Non-interest income:
Service charges on deposits 854 585
Lease financing fees 63 277
Mutual fund, annuity and insurance commissions 940 800
Loan brokerage and advisory fees 273 223
Private equity fund management fees 52 614
Gain on sale of securities -- 1,258
Gain on sale on loans and lease receivables 132 302
Gain on sale on investments in unconsolidated entities 11 --
Client warrant income (loss) 1,426 (1,959)
Equity (loss) in unconsolidated entities 95 (27)
Fees and other 698 985
------- -------
Total non-interest income 4,544 3,058
------- -------
Non-interest expense:
Salaries and employee benefits 4,401 4,990
Occupancy 586 613
Data processing 257 215
Furniture, fixtures and equipment 546 546
Professional services 578 815
Capital securities expense 572 561
Other 1,988 1,780
------- -------
Total non-interest expense 8,928 9,520
------- -------
Income before income taxes 1,117 610
Income tax expense 367 185
------- -------
Net income $ 750 $ 425
======= =======
Basic earnings per common share $ .12 $ .07
======= =======
Diluted earnings per common share $ .12 $ .07
======= =======
Dividends per common share $ -- $ .06
======= =======
Basic average common shares outstanding 6,206,177 5,684,940
========= =========
Diluted average common shares outstanding 6,342,450 5,829,134
========= =========
See Notes to Consolidated Interim Financial Statements.
Consolidated Interim Statements of Changes in Shareholders' Equity and
Comprehensive Income (Unaudited)
(Dollars in thousands)
Net
Unearned Accumulated
Unearned Compensation Other Total
Common Treasury ESOP Restricted Capital Retained Comprehensive Comprehensive Shareholders'
Stock Stock Shares Stock Surplus Earnings Income(Loss) Income (Loss) Equity
--------------------------------------------------------------------------------------------
For the three months ended March 31, 2002:
- -----------------------------------------
Balance at December 31, 2001 $5,818 $(628) $(1,448) $ (107) $44,029 $3,620 $ (685) $50,599
Issuance of stock under employee
benefit plans (64,375 common shares) 64 -- -- 30 237 -- -- 331
Retirement of restricted stock awards
(782 common shares) (1) -- -- 9 (8) -- -- --
Net income -- -- -- -- -- 750 -- $ 750 750
Other comprehensive loss, net of tax (a) -- -- -- -- -- -- (584) (584) (584)
-----
Net comprehensive income $166
=====
Issuance of stock under private
placement (1,153,330 common shares) 1,153 -- -- -- 7,071 -- -- 8,224
------ ----- ------ ------- ------- ------ ------- -------
Balance at March 31, 2002 $7,034 $(628) $(1,448) $ (68) $51,329 $4,370 $(1,269) $59,320
====== ===== ======= ======= ======= ====== ======= =======
For the three months ended March 31, 2001:
- ------------------------------------------
Balance at December 31, 2000 $5,814 $(1,245) $ -- $(858) $44,400 $3,848 $(1,799) $50,160
Issuance of stock under employee
benefit plans (21,343 common shares) 21 -- -- 197 124 -- -- 342
Retirement of restricted stock awards
(1,042 common shares) (1) -- -- 12 (11) -- -- --
Net income -- -- -- -- -- $425 -- $ 425 425
Other comprehensive income, net of tax(a) -- -- -- -- -- -- 1,929 1,929 1,929
------
Net comprehensive income $2,354
======
Purchase of treasury stock
(60,000 treasury shares) -- (451) -- -- -- -- -- (451)
Cash dividend declared -- -- -- -- (342) -- (342)
------ -------- ----- ----- ------- ------ ------- -------
Balance at March 31, 2001 $5,834 $(1,696) $ -- $(649) $44,513 $3,931 $ 130 $52,063
====== ======= ===== ===== ======= ====== ======= =======
(a) For three months ended March 31, 2002 2001
---- ----
Calculation of other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising during the period, net of tax $(584) $2,759
Less: Reclassification for gains included in net income, net of tax 830
----- -----
--
Other comprehensive income (loss), net of tax $(584) $1,929
====== ======
See Notes to Consolidated Interim Financial Statements.
Consolidated Interim Statements of Cash Flows (Unaudited)
(Dollars in thousands)
For the three months ended March 31, 2002 2001
- ------------------------------------- ----- ----
Cash flows from operating activities:
Net income $750 $ 425
Add (deduct) items not affecting cash flows from operating activities:
Depreciation and amortization 753 660
Provision for loan and lease losses 1,439 1,047
Client warrant (income) loss (1,426) 1,959
Gain on sale of securities available for sale -- (1,258)
Gain on sale of loans and leases (132) (302)
Gain on sale of investments in unconsolidated entities (11) --
Accretion of deferred loan and lease fees and expenses (368) (575)
Amortization of premiums/accretion of discounts on securities 451 112
(Income) loss in unconsolidated entities (95) 27
Other, net 39 166
(Increase) decrease in other assets 3,634 (10)
Increase (decrease) in other liabilities 3,362 (11,500)
----- -------
Net cash flows provided by (used in) operating activities 8,396 (9,249)
Cash flows from investing activities:
Capital expenditures (289) (1,753)
Purchases of investment and mortgage-backed securities available for sale (81,899) (82,744)
Purchases of investment and mortgage-backed securities held to maturity (27,361) (429)
Repayments on mortgage-backed securities available for sale 19,769 11,771
Repayments on mortgage-backed securities held to maturity 16 --
Proceeds from sales, maturity and calls of investment and mortgage-backed securities
available for sale 4,193 30,275
Proceeds from redemption and call of investment securities held to maturity 650 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 34 --
Proceeds from sale of loans and leases 7,197 8,589
Net cash paid in sale of TechBanc (21,399) --
Proceeds from sale of AMIC division of Progress Reality Advisors, Inc. -- 500
Investment in real estate owned (5) (447)
Proceeds from sale of real estate owned -- 816
Net (increase) decrease in loans and leases 15,712 (17,470)
Net investment in unconsolidated entities 1 (535)
------- -------
Net cash flows used in investing activities (83,381) (44,536)
------- -------
Cash flows from financing activities:
Net increase (decrease) in demand, NOW and savings deposits 28,898 (10,021)
Net increase (decrease) in time deposits 6,569 (12,350)
Net increase (decrease) in short-term borrowings 22,519 (11,622)
Proceeds from issuance of long-term debt -- 44,000
Repayment of long-term debt -- (10,000)
Dividends paid -- (342)
Purchase of treasury shares -- (451)
Net proceeds from issuance of stock under employee benefit plans 285 131
Net proceeds from issuance of stock in private placement 8,224 --
---------- -------
Net cash flows provided by (used in) financing activities 66,495 (655)
---------- -------
Net decrease in cash and cash equivalents (8,490) (54,440)
Cash and cash equivalents:
Beginning of year 32,526 84,997
---------- -------
End of period $24,036 $30,557
========== =======
Supplemental disclosures:
Non-monetary transfers:
Net conversion of loans receivable to real estate owned $ 2,705 $ --
========== =======
Notes received in sale of investment in NewSeasons Assisted Living Communities Series B
and C preferred stock $ -- $ 4,180
========== ========
See Notes to Consolidated Interim Financial Statements.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
(1) Basis of Presentation
In the opinion of management, the financial information reflects all
adjustments necessary for a fair presentation of the financial
information as of March 31, 2002 and December 31, 2001 and for the three
months ended March 31, 2002 and 2001 in conformity with accounting
principles generally accepted in the United States of America. These
interim financial statements should be read in conjunction with Progress
Financial Corporation's (the "Company") Annual Report on Form 10-K for
the year ended December 31, 2001. Operating results for the three months
ended March 31, 2002 are not necessarily indicative of the results that
may be expected for any other interim period or the entire year ending
December 31, 2002. The Company's principal subsidiaries are Progress Bank
(the "Bank"), Progress Capital, Inc., Progress Capital Management, Inc.,
Progress Financial Resources, Inc. and KMR Management, Inc. All
significant intercompany transactions have been eliminated.
(2) Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). FAS 142 addresses the financial
accounting and requires new reporting disclosures for acquired goodwill
and other intangible assets, but not those acquired in a business
combination, and for goodwill and other intangible assets after they have
been initially recognized in the financial statements. Goodwill will not
be amortized; it will be annually tested for impairment using specific
guidance under FAS 142. Other intangible assets that have indefinite
useful lives will not be amortized; they will also be annually tested for
impairment using specific guidance under FAS 142. Intangible assets that
have finite useful lives will continue to be amortized over their useful
lives, or the best estimate of their useful lives. FAS 142 is required to
be applied starting with fiscal years beginning after December 15, 2001;
however, goodwill and other intangible assets acquired after June 30,
2001 will be subject immediately to the nonamortization and amortization
provisions.
The Company adopted FAS 142 on January 1, 2002 and ceased amortizing its
goodwill. At that time goodwill in each business segment was tested and
no impairment loss was recognized. However, 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, including key personnel, in the Equipment Leasing segment. An
interim impairment loss of $82,000 was recorded in the first quarter of
2002 at the Equipment Leasing segment based on the expected present value
of future cash flows. Also during the first quarter of 2002, there was a
reduction in key personnel in the Company's other segments resulting in
an interim impairment loss of $27,000 based on the expected present value
of future cash flows.
(3) Office of Thrift Supervision Directive
During July 2001, the Company's Board of Directors approved a resolution
to comply with the terms of a directive issued by the Office of Thrift
Supervision ("OTS") that requires the Bank to (i) reduce its lending to
early stage technology companies; (ii) increase its leverage capital
ratio to no less than 8.0% and its total risk-basked capital ratio to no
less than 14.0% by April 1, 2002 through gradual compliance; and (iii)
increase its valuation allowance and implement improved credit review and
monitoring programs. In addition, the Company will not pay cash dividends
on its capital stock until the Bank achieves the required capital levels
and has implemented an acceptable capital plan. As such, the Company has
suspended the quarterly cash dividend on its common stock and its stock
repurchase program and has undertaken measures to achieve capital
compliance as promptly as possible. The increased capital levels reflect
the Bank's level of business lending particularly in the technology
sector and continued economic concerns.
On February 7, 2002 the OTS approved the Company's revised Capital
Enhancement Plan and agreed to extend the dates that the Bank must comply
with the targeted ratio of classified assets to capital. As revised, the
Bank's classified assets to capital ratio must not exceed 25% on June 30,
2002 and must not exceed 20% on September 30, 2002. At March 31, 2002,
the Bank's classified assets to capital ratio was approximately 34.7%.
The Bank is working aggressively to reduce the ratio and comply with the
terms of the directive; but there can be no assurance that the Bank will
be in compliance with these requirements on such dates. Failure to comply
with such ratios could result in the OTS taking further regulatory
action. As of March 31, 2002 the Bank was in compliance with the terms of
the OTS Directive.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(4) Shareholders' Equity
Common Stock Offering and Repurchase Program
--------------------------------------------
On February 11, 2002, the Company closed a private placement offering of
common stock to accredited investors of 1,153,330 common shares priced at
$7.50 a share, totaling $8.6 million, resulting in net proceeds of
approximately $8.3 million.
Under the Company's 2000 stock repurchase program to repurchase up to
285,000 shares, or five percent, of its outstanding common stock, 149,800
shares were repurchased as of May 31, 2001. As discussed above,
repurchases had been suspended since June 30, 2001 until the Bank
achieved capital compliance under the OTS directive; future repurchases
cannot take place without the approval of the OTS.
Earnings per Share
------------------
The following table presents a summary of per share data and amounts for
the included periods.
For the three months ended March 31,
(Dollars in thousands, except per share data) 2002 2001
----------------------------- --------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic Earnings Per Share:
Income available to common shareholders $750 6,206,177 $ .12 $425 5,684,940 $.07
===== ====
Effect of Dilutive Securities:
Options -- 136,273 -- -- 144,194 --
---- --------- ---- ---------
Diluted Earnings Per Share:
Income available to common shareholders
and assumed conversions $750 6,342,450 $ .12 $425 5,829,134 $.07
==== ========= ===== ===== ========= =====
Capital Resources
-----------------
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
specific capital categories were defined based on an institution's
capital ratios. To be considered "well capitalized," an institution must
generally have a tangible equity ratio of at least 2%, a Tier 1 leverage
ratio of at least 5%, a Tier 1 risk-based capital ratio of at least 6%
and a total risk-based capital ratio of at least 10%. Under the OTS
directive discussed above, the Bank must increase its leverage capital
ratio to no less than 8.0% and its total risk-basked capital ratio to no
less than 14.0% by April 1, 2002 through gradual compliance.
At March 31, 2002, the Bank's tangible equity ratio was 8.28%, Tier 1
leverage ratio was 8.30%, Tier 1 risk-based capital ratio was 13.58%, and
total risk-based capital ratio was 14.84%. As of March 31, 2002, the Bank
was classified as "well capitalized" and met the leverage capital and
total risk-based capital ratios under the OTS directive.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(5) Investment and Mortgage-Backed Securities
The following table sets forth the amortized cost, gross unrealized gains
and losses, estimated fair value and carrying value of investment and
mortgage-backed securities at the dates indicated:
Gross Gross
(Dollars in thousands) Amortized Unrealized Unrealized Estimated Carrying
At March 31, 2002 Cost Gains Losses Fair Value Value
------------------ ---------- ---------- ---------- ---------- --------
Available for Sale:
Equity investments $ 2,020 $ -- $ 1 $ 2,019 $ 2,019
U.S. Government Agencies 1,996 -- 24 1,972 1,972
Bank deposits 440 -- -- 440 440
Corporate bonds 1,921 -- 411 1,510 1,510
Mortgage-backed securities 265,328 907 2,327 263,908 263,908
-------- ---- ------ -------- --------
Total available for sale $271,705 $907 $2,763 $269,849 $269,849
======== ==== ====== ======== ========
Held to Maturity:
Federal Home Loan Bank Stock $ 6,350 $ -- $ -- $ 6,350 $ 6,350
U.S. Government Agencies 17,108 -- 784 16,324 17,108
Municipal bonds 16,112 208 334 15,986 16,112
Mortgage-backed securities 25,304 -- 352 24,952 25,304
-------- ---- ------ -------- --------
Total held to maturity $ 64,874 $208 $1,470 $ 63,612 $ 64,874
======== ==== ====== ======== ========
Gross Gross
(Dollars in thousands) Amortized Unrealized Unrealized Estimated Carrying
At December 31, 2001 Cost Gains Losses Fair Value Value
-------------------- --------- ---------- ---------- ---------- --------
Available for Sale:
Equity investments $ 1,923 $ -- $ -- $ 1,923 $ 1,923
U.S. Government Agencies 2,770 4 -- 2,774 2,774
Bank deposits 440 -- -- 440 440
Corporate bonds 1,919 -- 374 1,545 1,545
Mortgage-backed securities 205,741 806 1,401 205,146 205,146
-------- ---- ------ -------- --------
Total available for sale $212,793 $810 $1,775 $211,828 $211,828
======== ==== ====== ======== ========
Held to Maturity:
Federal Home Loan Bank Stock $ 6,500 $ -- $ -- $ 6,500 $ 6,500
U.S. Government Agencies 16,808 81 170 16,719 16,808
Municipal bonds 14,865 240 304 14,801 14,865
-------- ---- ------ -------- --------
Total held to maturity $ 38,173 $321 $ 474 $ 38,020 $ 38,173
======== ==== ====== ======== ========
(6) Loans and Leases, Net
The following table depicts the composition of the Company's loan and
lease portfolio at the dates indicated:
(Dollars in thousands) March 31, 2002 December 31, 2001
-------------- -----------------
Amount Percent Amount Percent
-------- -------- ------- -------
Commercial business $101,462 21.23% $123,546 24.47%
Commercial real estate 189,937 39.74 195,105 38.64
Construction, net of loans in process 84,339 17.64 77,380 15.32
Single family residential real estate 24,981 5.23 26,518 5.25
Consumer loans 45,009 9.42 44,821 8.88
Lease financing 36,986 7.74 43,342 8.58
Unearned income (4,766) (1.00) (5,770) (1.14)
-------- ------ -------- ------
Total loans and leases 477,948 100.00% 504,942 100.00%
(8,775) ======= (9,917) =======
Allowance for loan and lease losses -------- --------
Net loans and leases $469,173 $495,025
======== ========
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(7) Allowance for Loan and Lease Losses
The following table details changes in the Company's allowance for loan and
lease losses for the periods indicated:
(Dollars in thousands) For the Three Months
Ended March 31,
2002 2001
---- ----
Balance beginning of period $9,917 $7,407
Charge-offs:
Commercial business 1,301 226
Commercial real estate 696 29
Single family residential real estate -- 10
Lease financing 724 517
------ ------
Total charge-offs 2,721 782
------ ------
Recoveries:
Commercial business 65 --
Consumer loans 1 1
Lease financing 74 35
------ ------
Total recoveries 140 36
------ ------
Net charge-offs 2,581 746
Additions charged to operations 1,439 1,047
------ ------
Balance at end of period $8,775 $7,708
====== ======
Specific Valuation Allowance on Impaired Loans $ 47 $ --
====== ======
(8) TechBanc Sale
-------------
During January 2002, the Company completed the sale of TechBanc to
Comerica Bank - California, a subsidiary of Comerica Incorporated.
Included in the sale were loans, deposits and warrants of certain
TechBanc's technology-based companies. The aggregate fair value of loans
sold (including accrued interest receivable) was $25.0 million and
deposits sold (including accrued interest payable) totaled $46.4 million
with net cash paid of $21.4 million. At December 31, 2001, the loans were
classified as held for sale and carried at the lower of aggregate cost or
market value consisting of $23.3 million in commercial business loans and
$2.3 million in commercial real estate loans.
(9) Capital Securities
-------------------
During 1997, the Company issued $15.0 million of 10.5% capital securities
due June 1, 2027 (the "Capital Securities"). The Capital Securities were
issued by the Company's subsidiary, Progress Capital Trust I, a statutory
business trust created under the laws of Delaware. The Company is the
owner of all of the common securities of the Trust (the "Common
Securities"). The Trust issued $15.0 million of 10.5% Capital Securities
(and together with the Common Securities, the "Trust Securities"), the
proceeds from which were used by the Trust, along with the Company's
$464,000 capital contribution for the Common Securities, to acquire $15.5
million aggregate principal amount of the Company's 10.5% Junior
Subordinated Deferrable Interest Debentures due June 1, 2027 (the
"Debentures"), which constitute the sole assets of the Trust. The Company
has, through the Declaration of Trust establishing the Trust, Common
Securities and Capital Securities Guarantee Agreements, the Debentures
and a related Indenture, taken together, irrevocably and unconditionally
guaranteed all of the Trust's obligations under the Trust Securities.
In July 2000, the Company issued 6,000 shares, or $6.0 million, of
11.445% trust preferred securities, $1,000 liquidation amount per
security, due July 19, 2030 (the "Trust Preferred Securities"), in a
private offering managed by First Union Securities, Inc. The Trust
Preferred Securities represent undivided beneficial interests in Progress
Capital Trust II (the "Trust II"), a statutory business trust created
under the laws of Delaware, which was established by the Company for the
purpose of issuing the Trust Preferred Securities. The Company has fully,
irrevocably and unconditionally guaranteed all of the Trust II's
obligations under the Trust Preferred Securities.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(10) Commitments and Contingencies
-----------------------------
At March 31, 2002, the Company had $158.7 million in loan commitments to
extend credit, including unused lines of credit, and $9.3 million in
letters of credit outstanding.
(11) Segments
--------
The following table sets forth selected financial information by business
segment for the periods indicated:
Private Insurance/
Equipment Equity Fund Wealth Other
Banking Leasing Management Management Segments Corporate Total
------- --------- ----------- ---------- -------- --------- -----
(Dollars in thousands)
Total Assets at:
March 31, 2002 $835,346 $32,520 $ 71 $ 611 $ 1,018 $ 5,413 $874,979
December 31, 2001 803,588 37,351 10 678 1,175 8,578 851,380
Revenues for the three months ended:
March 31, 2002 9,684 583 52 934 200 31 11,484
March 31, 2001 9,368 1,203 614 790 586 (1,384) 11,177
Income (loss) for the three months ended:
March 31, 2002 1,452 (172) (25) 33 (76) (462) 750
March 31, 2001 1,636 169 62 (56) 61 (1,447) 425
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Company's Consolidated
Financial Statements and accompanying notes and with the Company's Annual Report
on Form 10-K for the year ended December 31, 2001. Certain reclassifications
have been made to prior period data throughout the following discussion and
analysis for comparability with 2002 data.
When used in filings by the Company with the Securities and Exchange Commission,
in the Company's press releases or other public or shareholder communications,
or in oral statements made with the approval of an authorized executive officer,
the words or phrases "will likely result," "are expected to," "will continue,"
"is anticipated," "estimate," "project," or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to certain
risks and uncertainties including changes in economic conditions in the
Company's market area, changes in policies by regulatory agencies, fluctuations
in interest rates, demand for loans in the Company's market area and competition
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made. The Company wishes to advise readers that
the factors listed above could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from any opinions or statements expressed with respect to future periods in any
current statements. These factors influence the Company's most critical
accounting policy, "Allowance for Loan and Lease Losses" and the related
"Provision for Loan and Lease Losses," which are further discussed in Footnote 7
on Page 10 and on Page 12 of this Form 10-Q.
RESULTS OF OPERATIONS
The Company recognized net income of $750,000, or diluted earnings per share of
$.12, for the three months ended March 31, 2002 compared to net income of
$425,000, or diluted earnings per share of $.07, for the first quarter of 2001.
Return on average shareholders' equity was 5.33% and return on average assets
was .35% for the three months ended March 31, 2002 compared to returns of 3.31%
and .20%, respectively, for the three months ended March 31, 2001.
Net Interest Income
Net interest income, on a tax-equivalent basis, decreased $1.2 million, or 14%,
as compared to the first quarter of 2001. The net interest margin for the first
quarter of 2002 was 3.53% compared to 4.03% for the same period in 2001 and
3.58% for the fourth quarter of 2001. In addition to the sale of loan portfolios
during the quarter, the reversal of interest income on three loans placed on
non-accrual also had a negative impact on the net interest margin of 14 basis
points.
Average earning assets for the first quarter of 2002 were $809.6 million
compared to $829.5 million for the same period in 2001. The decline was
primarily due to lower commercial business loan volume as a result of the
TechBanc sale which was partially offset with higher levels of investments in
mortgage-backed securities. Tax-equivalent interest income for the first quarter
of 2002 decreased $4.3 million, or 25%, over the same period in 2001 while
interest expense decreased $3.1 million, or 34%, for the same period. The
Company's cost of funds decreased 175 basis points, whereas its rate on earning
assets decreased 194 basis points in comparison with the three months ended
March 31, 2001.
Provision for Loan and Lease Losses
The provision for loan and lease losses was $1.4 million for the three months
ended March 31, 2002, compared to $1.0 million for the same period in 2001. The
provision was increased during the first quarter of 2002 primarily due to the
higher level of charge-offs in the residual TechBanc portfolio.
At March 31, 2002, the allowance for loan and lease losses amounted to $8.8
million or 1.84% of total loans and leases and 93.93% of total non-performing
loans and leases. At December 31, 2001, the allowance for loan and lease losses
amounted to $9.9 million or 1.87% of total loans and leases and 106.28% of total
non-performing loans and leases.
Non-interest Income
Non-interest income for the three months ended March 31, 2002 amounted to $4.5
million compared to $3.1 million for the same period in 2001. The quarter ended
March 31, 2002 included income of $1.4 million from the sale of client warrants
as compared to losses of $2.0 million from client warrants during the first
quarter of 2001, due to the permanent impairment of equity securities received
from warrants. There was no gain or loss on sale of securities during the first
quarter of 2002 as compared to gain on sale of securities of $1.3 million for
same quarter in 2001. Fee income for the quarter decreased $712,000 primarily
due to the decline in private equity fund management fees from the Company's
subsidiary, Progress Capital Management, Inc. ("PCM"), as the Company exited the
venture fund management business at December 31, 2001, and a reduction in
consulting fees from the Company's subsidiary, KMR Management, Inc. ("KMR").
Service charges on deposits amounted to $854,000 during the first quarter of
2002 compared to $585,000 for the comparable quarter in 2001. This 46% growth is
primarily attributable to the new deposit products implemented during the
quarter.
Non-interest Expense
Total non-interest expense was $8.9 million for the three months ended March 31,
2002 compared to $9.5 million for same period in 2001. Salaries and employee
benefits decreased $589,000 mainly due to PCM exiting the fund management
business and lower staffing levels as Progress Leasing Company ceased
originating new leases. Professional services expenses decreased by $237,000
primarily due to a reduction in the business activities of KMR. Other expenses
increased by $208,000 mainly due to certain costs associated with the sale of
warrants and an uncollectible receivable from a client of KMR.
FINANCIAL CONDITION
Loans and leases outstanding totaled $477.9 million at March 31, 2002 compared
to $530.5 million at December 31, 2001. This decrease was primarily due to the
sale of TechBanc loans to Comerica totaling $25.6 million, which were primarily
commercial business loans, as well the Asset-Based Lending sale and payoffs of
commercial business loans. Net increases in mortgage-backed securities were
$84.0 million since year-end primarily due to $105.1 million in purchases
partially offset by repayments of $19.8 million. Total deposits decreased to
$618.8 million at March 31, 2002 from $629.5 million at December 31, 2001 as a
result of the sale of $46.2 million in deposits to Comerica in January 2002
partially offset by $35.5 million in deposit growth during the quarter. Total
assets increased to $875.0 million at March 31, 2002 from $851.4 million at
December 31, 2001.
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
are usually caused by factors over which the Company has limited control. The
Company derives its liquidity from both its assets and liabilities. Liquidity is
derived from assets by receipt of interest and principal payments and
prepayments, by the ability to sell assets at market prices and by utilizing
unpledged assets as collateral for borrowings. Liquidity is derived from
liabilities by maintaining a variety of funding sources, including retail
deposits, FHLB borrowings and securities sold under agreement to repurchase.
The Company's primary sources of funds have historically consisted of deposits,
amortization and prepayments of outstanding loans, FHLB borrowings and
securities sold under agreement to repurchase and sales of investment and
mortgage-backed securities. During the three months ended March 31, 2002, the
Company reinvested its working capital primarily by purchasing mortgage-backed
securities to maintain its liquidity. For the three months ended March 31, 2002,
cash was provided by operating activities primarily due to net increases in
other liabilities primarily due to trade-date accounting entries for purchases
of mortgage-backed securities and net decreases in other assets. Cash was used
in investing activities primarily due to the purchases of mortgage-backed
securities partially offset by repayments on mortgage-backed securities. Cash
was provided by financing activities primarily due to increases in deposits and
short-term borrowings.
Non-Performing and Underperforming Assets
The following table details the Company's non-performing and underperforming
assets at the dates indicated:
March 31, December 31, March 31,
(Dollars in thousands) 2002 2001 2001
---- ---- ----
Loans and leases accounted for on a non-accrual basis $ 9,342 $ 9,331 $ 6,002
Other real estate owned, net of related reserves 4,243 1,533 1,356
------- ------- -------
Total non-performing assets 13,585 10,864 7,358
Accruing loans 90 or more days past due 3,244 1,125 2,971
------- ------- -------
Total underperforming assets $16,829 $11,989 $10,329
======= ======= =======
Non-performing assets as a percentage of net loans and leases
and other real estate owned 2.87% 2.08% 1.34%
======= ======= =======
Non-performing assets as a percentage of total assets 1.55% 1.28% .81%
======= ======= =======
Underperforming assets as a percentage of net loans and leases
and other real estate owned 3.55% 2.30% 1.88%
======= ======= =======
Underperforming assets as a percentage of total assets 1.92% 1.41% 1.14%
======= ======= =======
Allowance for loan and lease losses $ 8,775 $ 9,917 $ 7,708
======= ======= =======
Ratio of allowance for loan and lease losses to
non-performing loans and leases at end of period 93.93% 106.28% 128.42%
======= ======= =======
Ratio of allowance for loan and lease losses to underperforming
loans and leases at end of period 69.72% 94.85% 85.90%
======= ======= =======
Non-performing assets increased to $13.6 million at March 31, 2002 from $10.9
million at December 31, 2001 and from $7.4 million at March 31, 2001. The net
increase in non-performing assets since December 31, 2001 was primarily due to a
$2.7 million commercial property classified as other real estate owned and a
$2.1 million increase in commercial business non-accrual loans which were
partially offset by $1.2 million in commercial business charge-offs and $942,000
in commercial business payoffs. The $9.3 million of non-accrual loans at March
31, 2002 primarily consisted of: $6.6 million of commercial business loans, of
which $1.9 million are to pre-profit companies; $762,000 of lease financing;
$940,000 of commercial mortgages; $430,000 of consumer loans; and $543,000 of
single family residential mortgages.
Accruing loans 90 or more days past due increased from $1.1 million at December
31, 2001 to $3.2 million at March 31, 2002 primarily due to increased
delinquencies of commercial business loans. The $3.2 million of accruing loans
90 or more days past due at March 31, 2002 consisted of $2.9 million of
commercial business loans, of which $2.2 million are to pre-profit companies,
and $300,000 of commercial mortgages.
Delinquencies
The following table sets forth information concerning the principal balances and
percent of the total loan and lease portfolio represented by delinquent loans
and leases at the dates indicated:
March 31, 2002 December 31, 2001 March 31, 2001
--------------- ----------------- --------------
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Delinquencies:
30 to 59 days $4,999 1.04% $ 4,214 .80% $ 7,980 1.44%
60 to 89 days 701 .15 5,962 1.12 2,339 .42
90 or more days 3,244 .68 1,125 .21 2,971 .53
------ ---- ------- ---- ------- ----
Total $8,944 1.87% $11,301 2.13% $13,290 2.39%
====== ==== ======= ==== ======= ====
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For information regarding market risk, see the Company's Annual Report on Form
10-K for the year ended December 31, 2001, Item 7A, filed with the Securities
and Exchange Commission on March 22, 2002. The market risk of the Company has
not experienced any significant changes as of March 31, 2002 from the Annual
Report on Form 10-K.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in routine legal proceedings occurring in the ordinary
course of business which management, after reviewing the foregoing actions with
legal counsel, is of the opinion that the liability, if any, resulting from such
actions will not have a material effect on the financial condition or results of
operations of the Company.
On August 29, 2001, a shareholder's derivative action was filed against the
Company and its directors in the Delaware Chancery Court alleging failure to
comply with the Home Owners' Loan Act, insider trading, and breach of their
fiduciary duty. The plaintiff demands judgement against the Company and its
directors for the amount of damages sustained by the Company as result of the
directors' breaches of fiduciary duty, awarding the plaintiff the costs and
disbursements of the actions, including expenses of the lawsuit and granting
such other and further relief as the Court may deem just and proper. The Company
believes that this action is without merit and will defend 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
anticipating a ruling on its motion during the third quarter of 2002.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
None.
(b) Reports on Form 8-K
1. On January 9, 2002, the Company filed a Current Report for January 7,
2002 announcing that it had sold its interest in a non-bank
subsidiary - sale of assets of Progress Development.
2. On January 9, 2002, the Company filed a Current Report for January 8,
2002 announcing its wholly-owned subsidiary, Progress Capital
Management, Inc. had exited the venture fund management business and
reduced private equity exposure.
3. On January 23, 2002, the Company filed a Current Report announcing the
Fourth Quarter 2001 earnings, the distribution of the Fourth Quarter
2001 analyst package and the raising of a private placement offering
of common stock.
4. On February 7, 2002, the Company filed a Current Report for
January 31, 2002 announcing the closing of the sale of TechBanc
assets to Comerica Bank-California.
5. On February 14, 2002, the Company filed a Current Report for
February 12, 2002 announcing the approval of the capital plan by the
Office of Thrift Supervision.
6. On February 14, 2002, the Company filed a Current Report for
February 13, 2002 announcing the closing of a private placement
offering of common stock.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Progress Financial Corporation
May 10, 2002 /s/ W. Kirk Wycoff
- --------------------------- ----------------------------------------
Date W. Kirk Wycoff, Chairman, President and
Chief Executive Officer
May 10, 2002 /s/ Michael B. High
- --------------------------- ----------------------------------------
Date Michael B. High, Chief Financial Officer
and Chief Operating Officer