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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2001
Commission File Number: 0-14815
PROGRESS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-2413363
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4 Sentry Parkway - Suite 200
P. O. Box 3036
Blue Bell, Pennsylvania 19422-0764
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 825-8800
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Securities registered pursuant to Section 12(b) of the Act: Non applicable
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, $ 1.00 par value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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The aggregate market value of the voting stock, held by non-affiliates of the
Registrant as a group, was $52,487,799 as of March 8, 2002, based upon the
closing price of $8.51 per share of the Registrant's common stock on March 8,
2002 as reported by The Nasdaq Stock Market(SM).
As of March 8, 2002, there were 6,758,044 issued and outstanding shares of the
Registrant's Common Stock.
Documents Incorporated By Reference:
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(1) Portions of the definitive proxy statement for the 2002 Annual Meeting of
Shareholders are incorporated into Part III, Items 10 through 13 of this
Form 10-K.
PROGRESS FINANCIAL CORPORATION
Table of Contents
PART I Page
Item 1. Business ............................................................................. 3
Item 2. Properties ........................................................................... 10
Item 3. Legal Proceedings .................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders .................................. 10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ............ 10
Item 6. Selected Consolidated Financial Data ................................................. 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................................. 12
Item 7A. Quantitative and Qualitative Disclosure about Market Risk ........................... 26
Item 8. Financial Statements and Supplementary Data .......................................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ............................................................... 58
PART III
Item 10. Directors and Executive Officers of the Registrant .................................. 58
Item 11. Executive Compensation .............................................................. 58
Item 12. Security Ownership of Certain Beneficial Owners and Management ...................... 58
Item 13. Certain Relationships and Related Transactions ...................................... 59
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ..................... 59
Signatures .......................................................................... 61
2
PART I
Item 1. Business
General
Progress Financial Corporation (the "Company"), headquartered in Blue
Bell, Pennsylvania, is a financial services company incorporated under the laws
of the State of Delaware. The Company owns all of the outstanding stock of
Progress Bank (the "Bank"), a federally chartered savings bank. The Company is a
registered unitary thrift holding company and is authorized as a Delaware
corporation to engage in any activity permitted by the Delaware General
Corporation Law and federal law and regulation. The holding company structure
permits the Company to expand the size and scope of the financial services
offered beyond those that the Bank is permitted to offer.
The Company's current business strategy is to focus on community
banking and wealth management, providing a full range of traditional banking
services including commercial business loans, commercial real estate loans,
residential construction and consumer lending, funded primarily by customer
deposits and providing financial planning services, life insurance and
investments. The Company's business activities also include commercial mortgage
banking and brokerage services and financial and operational management
consulting services for commercial clients, which provide an additional source
of fee income. The Company began 2001 focused on its corporate simplification
program, which commenced in early 2000. As part of this new strategy, the
Company reduced the number of its businesses at the end of 2001, including
venture fund management and real estate development. The Bank also sold the
technology lending group to Comerica Bank--California ("Comerica") which closed
in January 2002.
Banking. The Bank increased its retail network with the addition of four banking
offices during 2001 expanding further into Bucks County, Pennsylvania and into
the state of New Jersey. The Bank has a total of twenty banking offices in the
Delaware Valley area with ten full-service banking offices located in Montgomery
County, four full-service banking offices in Bucks County, one full-service
banking office in Delaware County, two full-service banking offices in Chester
County, two full-service banking offices in Philadelphia County, in southeastern
Pennsylvania and one full-service banking office in Lambertville, Hunterdon
County, New Jersey. In 2001, banking hours were expanded at all banking offices
to give clients increased convenience of banking. Also, during 2001, item
processing was brought in-house, providing more management oversight, greater
operational efficiency and improved quality.
Historically, the principal business of the Company consisted of
attracting deposits from the general public through the Bank's banking office
network and using such deposits to originate loans secured by first mortgage
liens on existing single-family residential, multi-family residential and
commercial real estate as well as to originate construction loans. Beginning in
1995, the Company's emphasis shifted to commercial business, commercial real
estate, construction lending and equipment leasing, with a focus on providing
such banking services to small- and medium-sized businesses, including companies
in the technology sector. During 2001, the Company decided to reduce its
exposure in the technology sector and dedicate its resources to more traditional
lines of business which have a more predictable earnings level including
expanding the retail franchise and focusing on core banking. Therefore, the
Company exited the business of lending to pre-profit companies and in November
2001 entered into an agreement to sell a significant portion of loans in the
technology sector, which was closed in January 2002. The Company also
de-emphasized the equipment leasing operation and is exiting asset-based
lending.
The Company also invests in mortgage-backed securities, including
securities which are insured or guaranteed by the U.S. Government and agencies
thereof, and other similar investments permitted by applicable laws and
regulations. In addition, the Bank is periodically involved in real estate
development and related activities, through its subsidiaries, primarily to
facilitate the completion and sale of certain property held as real estate
owned.
Commercial Business Lending. The Bank's commercial business lending
area, which excludes loans that had been originated through TechBanc (discussed
on page 4), provides customized loan, deposit and investment products, as well
as cash management services to small- and lower middle-market businesses.
Through the Bank, the Company originates secured or unsecured loans for
commercial, corporate, business and agricultural purposes, which include the
issuance of letters of credit.
As a result of acquisitions of small- and medium-sized financial
institutions by large bank holding companies in southeastern Pennsylvania in
recent years, a growing number of small- and middle-market commercial customers
have sought the full range of commercial banking services that the Bank offers
due to the personalized service the Bank provides. The Company believes it has
an opportunity to expand further its commercial lending relationships and
increase its commercial deposits due to the willingness to tailor its products
to the small- and middle-market businesses. The Bank has made a
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concentrated effort to offer high net worth individuals enhanced private banking
products and services working closely with Progress Financial Resources, Inc. to
identify and meet the specialized investment and wealth planning needs of this
affluent market.
The Bank's commercial business lending portfolio was $99.3 million at
December 31, 2001. Most commercial business loan customers are small- to
middle-market businesses located in the Bank's primary market area. Generally,
commercial business loans are between $100,000 and $2.5 million; however, the
largest commercial business loan at December 31, 2001 was $3.5 million. The Bank
provides eBusiness Banking, a device that makes commercial cash management
products available on-line. Several eBusiness Banking access packages are
available to coordinate with the different types of business checking accounts.
Government Guaranteed Lending started in January 2000 providing loans
through a variety of federally guaranteed programs, primarily those administered
by the Small Business Administration ("SBA"). The Bank has been awarded
Preferred Lending Program status, reserved for the most active and knowledgeable
lenders. This designation streamlines the lending process by allowing the unit
to underwrite SBA loans independently and grant credit approval without prior
SBA review. For its first year in operation, which ended on September 30, 2001,
the department ranked second out of 66 approved lenders in the SBA's
Philadelphia District, booking 85 loans worth over $23 million. At December 31,
2001Government Guaranteed Lending had $10.7 million ($19.8 million gross of $9.1
million in participations sold) in commercial business loans.
TechBanc. The Bank established the Specialized Lending Division in
1996, in order to provide customized financial services to companies in the
technology, healthcare and insurance industries. In 2000, the Specialized
Lending Division was renamed TechBanc. TechBanc primarily focused on lending to
technology-based companies in the five county Philadelphia area, New Jersey,
Northern Delaware and the Baltimore, Maryland and Washington D.C. regions.
Generally, loans were originated with a balance of between $100,000 and $5.0
million.
During 2001, the Bank decided to exit the business of lending to
pre-profit companies and wind down the technology-based portfolio of loans to
pre-profit companies. Although TechBanc has significantly contributed to the
profitability of the Bank, exiting this business line allows the Bank to
dedicate its resources to more traditional lines of business which have a more
predictable earnings level including focusing on community banking. To comply
with the directive issued by the Office of Thrift Supervision to reduce lending
to early stage technology companies, the Bank entered into an agreement to sell
the technology lending group to Comerica. The sale closed in January 2002.
Approximately 25 commercial business loan relationships with balances totaling
$23.3 million were classified as loans held for sale to Comerica at December 31,
2001. The sale also included one loan relationship amounting to $2.3 million
which was classified as commercial real estate loans held for sale at December
31, 2001. Also included in the sale were related customer deposits and warrants
to purchase common stock of these companies.
At December 31, 2001, the Bank's TechBanc loan portfolio (excluding
loans held for sale) consisted of approximately 25 commercial business loan
relationships with an aggregate balance of $24.3 million outstanding; the
largest loan relationship had an outstanding balance of $5.7 million which was
paid off in February 2002.
In addition to providing financing, the Company often obtained an
equity position in the borrower in the form of warrants to purchase common stock
of the borrower. At December 31, 2001, the Company held warrants to purchase
common stock of 35 companies that were customers of TechBanc. Warrants to
purchase common stock of an additional 12 companies were included in the loans
held for sale to Comerica. The Company generally recognizes client warrant
income on such investments when such common stock is publicly traded and any
applicable restriction or lock-up period on the sale of the warrants or the
common stock expires. At December 31, 2001 there is no carrying value for client
warrants. There can be no assurance that the common stock of any of these
companies will become publicly traded or that the common stock will trade at or
above the warrant exercise price. As an incentive, 10% to 15% of any proceeds
realized from the warrants during each six-month period beginning in January and
July is contributed to an incentive pool to be paid to employees of TechBanc.
The incentive pool is reduced proportionately by the level of charge-offs the
Bank has realized from loans in the TechBanc portfolio during such six-month
period. This plan was terminated for any new warrants received by the Company
after January 1, 2001. No payments were made under this plan during 2001.
The following is a brief description of the only company in which the
Company held warrants at December 31, 2001 for which the underlying common stock
was publicly traded:
Axeda Systems Inc. ("Axeda") formerly Ravisent Technologies, Inc is a
DVD hardware and software company located in Malvern, Pennsylvania. The
Company holds warrants to purchase 50,000 shares of Axeda common stock
with an exercise price of $3.56 per share and an expiration of seven
years from the date of issue. Axeda went public
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at an initial offering price of $12.00 per share of common stock on
July 16, 1999. The trading of this stock, like many Internet companies,
is very volatile. Axeda closed at $3.50 per share on December 31, 2001.
Upon exercise of the warrant, the Company would be prohibited, under
General Rule 144 of the Securities Act of 1933, from selling or
otherwise disposing of the stock acquired for a period of 12 months.
Commercial Real Estate Lending. The Bank originates mortgage loans
secured by multi-family residential and commercial real estate. Commercial real
estate loans originated by the Bank are primarily secured by office buildings,
retail stores, warehouses and general-purpose industrial space. Commercial real
estate loans also include multi-family residential loans, substantially all of
which are secured by apartment buildings. Significant portions of such loans are
secured by owner-occupied properties and relate to borrowers that have an
existing banking relationship with the Bank. Within Commercial Real Estate
Lending, the Real Estate Capital Markets Lending Program enables the Bank to
provide its real estate clients with non-recourse, long-term, fixed-rate
alternatives for all major types of income properties located within and outside
of the normal geographical lending area.
At December 31, 2001, the Bank's commercial real estate loan portfolio
consisted of approximately 380 loans with an aggregate principal balance of
approximately $197.4 million which included two TechBanc loans held for sale to
Comerica of $2.3 million. The Bank's largest commercial real estate loan
customer had an outstanding balance of $5.7 million. Although terms vary,
commercial real estate loans secured by existing properties generally have
maturities of ten years or less and interest rates which adjust every one, three
or five years in accordance with a designated index.
At December 31, 2001, substantially all of the Bank's commercial real
estate loan portfolio was secured by properties located within the eastern
Pennsylvania and New Jersey market area. Loan-to-value ratios on the Bank's
commercial real estate loans are limited to 80% or lower, except in certain
limited circumstances. In addition, as part of the criteria for underwriting
permanent commercial real estate loans, the Bank generally imposes a debt
service coverage ratio (the ratio of net cash from operations before payment of
debt service to debt service) of at least 1.2x. It is also the Bank's general
policy to obtain personal guarantees of its commercial real estate loans from
the principals of the borrower.
Commercial real estate lending is generally considered to involve a
higher degree of risk than single-family residential lending. Such lending
typically involves large loan balances concentrated in a single borrower or
groups of related borrowers. In addition, the payment experience on loans
secured by income-producing properties is typically dependent on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the real estate market or in the economy
generally. The Bank generally attempts to offset the risks associated with
commercial real estate lending by, among other things, lending primarily in its
market area, periodically inspecting each property, using conservative
loan-to-value ratios in the underwriting process and obtaining financial
statements and rent rolls from all commercial and multi-family borrowers on at
least an annual basis.
The Company also conducts commercial mortgage banking and brokerage
services through Progress Realty Advisors, Inc. ("PRA"), a subsidiary of the
Bank, based in Shrewsbury, New Jersey. PRA was formed as a complement to the
Bank's commercial lending activities in order to provide lending services for
borrowers where borrowing needs are not consistent with the Bank's lending
operations due to, among other things, the amount of financing required,
geographic location of the borrower, recourse provisions and business/banking
relationships. PRA specializes in originating, underwriting and closing
commercial real estate financing for residential, multi-family and commercial
properties for other financial institutions, insurance and finance companies for
a fee.
Construction Lending. Through the Bank, the Company also offers both
residential construction loans and, to a lesser extent, commercial construction
loans. At December 31, 2001, the Company's construction loan portfolio consisted
of approximately 80 loans with an aggregate principal balance of approximately
$77.4 million and the Company's largest construction loan had an outstanding
balance of $18.6 million, of which $12.4 million was participated to other
financial institutions on a non-recourse basis.
Construction loans generally offer the potential for higher yields and
afford the Company the opportunity to increase the interest rate sensitivity of
its loan portfolio. Construction financing is generally considered to involve a
higher degree of risk of loss than long-term financing on improved,
owner-occupied real estate. Risk of loss on a construction loan is dependent in
large part upon the accuracy of the initial estimate of the property's value at
completion of construction or development, the estimated cost (including
interest) of construction and the financial strength of the borrower. During the
construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Company may be required to advance funds beyond the amount originally committed
to permit completion of the development. If the estimate of value proves to be
inaccurate, the Company may be confronted, at or prior to the maturity of the
loan, with a project having a value which is insufficient to assure full
repayment, in which case the Company would have to rely upon the borrower's
financial ability.
5
The Company generally attempts to address the additional risks
associated with construction lending by, among other things, lending primarily
in its market area, periodically inspecting each property during the
construction period, using conservative loan-to-value ratios in the underwriting
process and generally requiring personal guarantees. At December 31, 2001,
substantially all of the Company's construction loans were secured by properties
located within the Company's primary market area. In addition, residential
construction loans are generally made for 75% or less of the appraised value of
the property upon completion. For owner-occupied construction/permanent loans,
the Bank will lend up to 80% of the lesser of the full appraised value or the
land plus costs. Moreover, the Company does not originate loans for the
construction of speculative (or unsold) residential properties. Prior to making
a commitment to fund a construction loan, the Company requires both an appraisal
of the property by independent appraisers approved by the Board of Directors and
a study of the feasibility of the proposed project.
Construction loans, including land loans, generally have maturities of
12 to 24 months (up to three years in the case of land loans). Interest rates on
construction loans generally adjust in accordance with a designated index.
Advances are generally made to cover actual construction costs, and generally
include a reserve for paying the stated interest due on the loan during the life
of the loan. Loan proceeds are disbursed as inspections of construction progress
warrants and as pre-construction sale and leasing requirements generally imposed
by the Company are met.
Consumer Lending. Subject to restrictions contained in applicable
federal laws and regulations, the Bank is authorized to make loans for a wide
variety of personal or consumer purposes. At December 31, 2001 the Bank's
consumer loan portfolio consisted of approximately 1,800 loans with an aggregate
outstanding balance of $44.8 million.
The Bank has been emphasizing a variety of consumer loans in recent
years in order to provide a full range of financial services to its customers
and because such loans generally have shorter terms and higher interest rates
than traditional first mortgage loans. The consumer loans offered by the Bank
include home equity loans and lines of credit, deposit account secured loans and
loans that are secured by personal property, including automobiles.
Home equity loans are originated by the Bank for up to 90% of the
appraised value, less the amount of any existing prior liens on the property.
The Bank also offers home equity lines of credit in amounts up to 90% of the
appraised value, less the amount of any existing prior liens. Home equity loans
have a maximum term of 15 years, and the interest rate is dependent upon the
term of the loan. The Bank secures the loan with a mortgage on the property
(generally a second mortgage) and will originate the loan even if another
institution holds the first mortgage.
Consumer loans generally have shorter terms and higher interest rates
than mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. In addition, consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely effected by job loss, divorce, illness and personal bankruptcy. In
most cases, any repossessed collateral for a defaulted consumer loan will not
provide an adequate source of repayment of the outstanding loan balance. The
Company believes that the generally higher yields earned on consumer loans
compensate for the increased credit risk associated with such loans and that
consumer loans are important to its efforts to increase rate sensitivity,
shorten the average maturity of its loan portfolio and provide a full range of
services to its customers.
Equipment Leasing. The Company provides equipment leasing services primarily to
small- and medium-sized businesses. At December 31, 2001, the Company's lease
financing portfolio consisted of approximately 2,850 leases with an outstanding
balance of $37.6 million. This was a decrease of $18.6 million from the
outstanding balance at December 31, 2000 primarily due to the leasing operation
being de-emphasized as the result of the corporate simplification initiative. In
December 2000, the Company had sold its Maryland-based leasing division
resulting in the sale of $31.0 million of lease financing receivables.
Equipment lease financing is provided through the Bank's subsidiary,
Progress Leasing Company ("PLC") located in Blue Bell, Pennsylvania. The Company
provides leasing arrangements for essential-use equipment primarily to clients
within the market area. The origination of small ticket leases outside of the
market area has been eliminated. The Company provides lease financing for a wide
variety of business equipment, including computer systems, telephone systems,
furniture, landscaping and construction equipment, medical equipment, dry
cleaning equipment and graphic systems equipment.
For some of the Company's leases, the Company may retain the leased
property upon expiration of the lease based on the residual value, which
generally does not exceed 10% of the original cost. In the event that the
residual value is less than provided for in the lease, the Company may have a
loss related to the disposition of such property. However, because a majority of
the Company's leases are bought out or extended at the end of their terms, the
Company has not experienced any material losses in aggregate residual values to
date.
6
Private Equity Fund Management. Progress Capital Management, Inc. ("PCM"), a
subsidiary of the Company, previously managed Ben Franklin/Progress Capital
Fund, L.P. ("Ben Franklin") and NewSpring Ventures, L.P. ("NewSpring"). PCM
earned fees for managing these funds. At December 31, 2001, PCM exited the fund
management business as the Company continues to redirect its focus on community
banking and due to the sale of TechBanc relationships to Comerica.
The Ben Franklin Fund commenced operations in December 1997 and
provided subordinated debt financing to early-stage Mid-Atlantic based
technology companies. In addition, Ben Franklin generally received
warrants to purchase equity of the borrowers in connection with such
lending. The fund was closed for making new investments at December 31,
2001 and is distributing its proceeds to limited partners.
NewSpring, a $90 million equity Small Business Investment Company
formed in 1999, primarily invested in Mid-Atlantic companies with
significant growth potential, proven management and strategic
competitive advantage. PCM transferred the management of NewSpring on
December 31, 2001 to NewSpring Capital Management, Inc. which was
formed by the NewSpring operating partners. Additionally, as part of
the decision to exit the fund management business, the Company sold its
limited partnership interest in NewSpring to the Eastern Technology
Fund on December 31, 2001. The Company repurchased a 6.67 percent
limited partnership interest in NewSpring during the first quarter of
2002 which was required as part of the sale at December 31, 2001.
Insurance/Wealth Management. Progress Financial Resources, Inc. ("PFR"), a
subsidiary of the Company, commenced operations in January 1999. PFR, a Delaware
corporation headquartered in Philadelphia, Pennsylvania, is a comprehensive
wealth management company, serving high net-worth individuals, small business
owners and professionals. PFR offers investments, insurance, estate planning,
401 (k) plans, executive compensation planning and retirement planning services.
PFR offers securities and insurance products, primarily but not exclusively,
through AXA Advisors, LLC (New York, NY). During 2001, Progress Financial
Advisors was created to provide fee-based financial planning and business
advisory services such as estate planning, succession planning, executive
compensation plan design and investment management.
Other Activities. Progress Capital, Inc. ("PCI"), a subsidiary of the Company,
was formed in 1996 and is the corporate general partner of Ben Franklin and
hold's the Company's equity interest in Ben Franklin. PCI holds the equity
interest in NewSpring. PCI also holds several investments in other privately
held companies amounting to $1.9 million at December 31, 2001.
Progress Development Corp ("PDC") was formed by the Company in February
1998 to invest in a joint venture partnership, Progress Development I L.P.,
which had acquired an interest in NewSeasons Assisted Living Communities
("NewSeasons") with Independence Blue Cross. NewSeasons owns, acquires, develops
and operates assisted living residences for the elderly. In addition, Progress
Development I L.P. provided fee based development, construction management and
financial services to NewSeasons and other investors. During the first quarter
of 2001, the Company sold its investment in New Seasons Assisted Living
Communities Series B and C preferred stock and at December 31, 2001, the Company
sold its interest in Progress Development I. L.P. to Dewey Commercial Investors,
L.P. as the Company continues to redirect its focus to core banking business.
KMR Management, Inc. ("KMR"), a Pennsylvania based corporation, was
acquired by the Company in January 2000. KMR provides fee-based management
consulting services to companies that are in transition or crisis. Working
primarily for companies with up to $50 million in sales, KMR takes an active
role in short-term management of its clients' businesses. Given the
counter-cyclical nature of its business, KMR's services are in greater demand
during periods of economic downturn.
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Financial Information by Business Segment
The Company has four principal activities: Banking, Equipment Leasing,
Private Equity Fund Management and Insurance/Wealth Management. Emerging
operating segments not directly related to the four principal activities and
that do not currently meet the quantitative thresholds of a reportable segment
are aggregated under Other Segments. Intercompany business transactions, the
parent company and other non-operating segments are aggregated under Corporate.
The measurement of the performance of these business segments is based on the
Company's current management structure and is not necessarily comparable with
similar information for any other financial institution. The information
presented is also not necessarily indicative of each segment's financial
condition and results of operations if they were independent entities. The
following selected financial information by business segment is presented in
thousands of dollars:
Private Equity Insurance/
Equipment Fund Wealth Other
Banking Leasing Management Management Segments Corporate Total
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Assets at:
December 31, 2001 $ 803,588 $37,351 $ 10 $ 678 $ 1,175 $ 8,578 $ 851,380
December 31, 2000 842,901 54,886 114 1,640 1,176 13,532 914,249
Revenues for the year ended:
December 31, 2001 38,303 3,764 2,428 3,059 2,022 (1,852) 47,724
December 31, 2000 33,376 9,058 2,230 4,566 1,058 1,107 51,395
December 31, 1999 29,849 5,799 699 2,645 -- 5,337 44,329
Income from continuing operations
for the year ended:
December 31, 2001 4,536 (625) 335 (179) 24 (3,348) 743
December 31, 2000 4,531 2,088 349 52 (85) (1,278) 5,657
December 31, 1999 4,259 112 126 (189) -- 1,724 6,032
Competition
The Company faces strong competition both in attracting deposits and
making loans. As a provider of a wide range of financial services, the Company
competes with national and state banks, savings and loan associations,
securities dealers, brokers, mortgage bankers, finance and insurance companies,
and other financial service companies. The ability of the Company to attract and
retain deposits depends on its ability to generally provide a rate of return,
liquidity and risk comparable to that offered by competing investment
opportunities. The Company competes for loans principally through the interest
rates and loan fees it charges and the efficiency and quality of services it
provides borrowers.
REGULATION AND SUPERVISION
General
The Company, as a unitary thrift holding company, is subject to
comprehensive examination, supervision and regulation by the Office of Thrift
Supervision ("OTS"). Because the Company was a unitary savings and loan holding
company on May 4, 1999, it is generally not restricted in the types of
investments and activities it may engage in at the holding company and
non-savings association affiliate levels; the Bank is subject to certain
restrictions in its dealings with the Company and affiliates thereof. Three of
the Company's non-banking subsidiaries, KMR, PCM and PDC, are subject to the
laws of the Commonwealth of Pennsylvania. PCI and PFR are Delaware corporations.
The Bank
Lending Restrictions
As a federally chartered savings bank, the Bank is subject to certain
lending restrictions. Commercial business loans are limited to 20% of the Bank's
assets; there is no limitation on the guaranteed portion of Small Business
Association ("SBA") commercial loans. Mortgage loans secured by non-residential
properties are limited to four times the Bank's risk-based capital. Consumer
loans are subject to a limitation of 35% of the Bank's assets. Under federal
regulations financing leases are either considered loans, in which case are
accordingly classified as and aggregated with commercial, consumer or
agricultural loans based upon the underlying collateral or personal property, or
as operating leases which are subject to a
8
separate 10% of assets limitation. The Company's financing leases are considered
operating leases and are subject to the 10% limitation. At December 31, 2001,
the Bank was in compliance with all loan limitations.
The Bank is also limited, under federal regulation, in the amount it
can lend to one borrower. At December 31, 2001, the Bank's loans-to-one-borrower
limit was approximately $11.0 million. The Bank was in compliance with this
limitation at December 31, 2001.
Insurance of Deposits
The Bank's deposits are insured by the Savings Association Insurance
Fund ("SAIF") to a maximum of $100,000 for each depositor. The Federal Deposit
Insurance Corporation ("FDIC") requires an annual audit by independent
accountants and may also examine the Bank.
Federal law requires that the FDIC maintain the reserve level of each
of the SAIF and the Bank Insurance Fund ("BIF") at 1.25% of insured deposits.
Deposit insurance premiums in 2001 averaged 1.90 cents per $100 of deposits
compared to an average 2.07 cents per $100 of deposits in 2000 and 5.93 cents
per $100 of deposits in 1999. Deposit insurance is payable on a quarterly basis.
Qualified Thrift Lender Test
All savings associations are required to meet a qualified thrift lender
("QTL") test set forth in Section 10(m) of the Home Owners' Loan Act ("HOLA")
and regulations of the OTS thereunder to avoid certain restrictions on their
operations. A savings association qualifies as a QTL if it is a domestic
building and loan association under the Internal Revenue Code of 1986 or if 65%
or more of its "portfolio assets" (as defined) consist of certain housing, small
business, and consumer related assets on a monthly average basis in 9 out of
every 12 months.
The Bank complied with this test for 2001. At December 31, 2001,
approximately 67.47% of the Bank's assets were invested in qualified thrift
investments, which was in excess of the percentage required to qualify under the
QTL test.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank of Pittsburgh
("FHLB"), which administers the home financing credit function and serves as a
source of liquidity for member savings associations, commercial banks and other
eligible institutions within its assigned region. It makes loans to members
(i.e., advances) in accordance with policies and procedures established by its
Board of Directors. As of December 31, 2001, the Bank's advances from the FHLB
amounted to $117.0 million. As a member, the Bank is required to purchase and
maintain stock in the FHLB in an amount equal to the greater of 1% of its
mortgage related assets or .3% of total assets. At December 31, 2001, the Bank
had $6.5 million in FHLB stock, which was in compliance with this requirement.
Federal Limitations on Transactions with Affiliates
Transactions between a savings association and any affiliate are
governed by Section 23A and 23B of the Federal Reserve Act. In addition to the
restrictions imposed, no savings association may (i) loan or otherwise extend
credit to an affiliate, except for any affiliate which engages only in
activities which are permissible for bank holding companies, or (ii) purchase or
invest in any stocks, bonds, debentures, notes, or similar obligations of any
affiliate, except for affiliates which are subsidiaries of the savings
association.
In addition, 12 CFR Part 215 (Regulation O) of the Code of Federal
Regulations places restrictions on loans by the Bank to executive officers,
directors, and principal shareholders of the Company and the Bank. At December
31, 2001, the Bank was in compliance with this regulation.
Employees
As of December 31, 2001, the Company had a total of 306 full-time
equivalent employees. Employment at the Company's individual subsidiaries was as
follows: The Bank and its subsidiaries PLC and PRA had 264 full-time equivalent
employees; PFR had 31 full-time equivalent employees; PCM had 7 full-time
equivalent employees and KMR had 4 full-time equivalent employees.
9
Item 2. Properties
The Company's and the Bank's executive offices are located at 4 Sentry
Parkway, Suite 200, Blue Bell, Pennsylvania. The Bank conducts business from
nineteen Pennsylvania branch offices in Bridgeport, Plymouth Meeting, East
Norriton, Chestnut Hill, Conshohocken, Glenside, King of Prussia, Lansdale,
Norristown, Jeffersonville, Paoli, Lionville, Southampton, Trappe, Warrington,
Bensalem, Doylestown, Rosemont and the Andorra community of Philadelphia; six of
which are owned and thirteen are leased. Lambertville, NJ is our first New
Jersey branch. The location is leased. PLC conducts equipment-leasing business
in leased facilities in Blue Bell, PA. PRA has leased locations in Blue Bell, PA
and Shrewsbury, NJ. KMR has lease office space in Willow Grove, PA. PFR leases
its location in Philadelphia, PA and leases office space in Blue Bell, PA and
Northfield, NJ.
Item 3. Legal Proceedings
The Company is involved in routine legal proceedings occurring in the
ordinary course of business which management, after reviewing the foregoing
actions with legal counsel, is of the opinion that the liability, if any,
resulting from such actions will not have a material effect on the financial
condition or results of operations of the Company.
On August 29, 2001, a shareholder's derivative action was filed
against the Company and its directors in the Delaware Chancery Court alleging
failure to comply with the Home Owners' Loan Act, insider trading, and breach of
their fiduciary duty. The plaintiff demands judgment against the Company and its
directors for the amount of damages sustained by the Company as result of the
directors' breaches of fiduciary duty, awarding the plaintiff the costs and
disbursements of the actions, including expenses of the lawsuit and granting
such other and further relief as the Court may deem just and proper. The Company
believes that this action is without merit and is defending the action
vigorously. On December 7, 2001 the Company filed an Opening Brief and Motion to
Dismiss the Complaint, which the plaintiff filed an opposition to on January 25,
2002. On March 8, 2002 the Company filed a Reply Brief in support if its motion
to dismiss.
Item 4. Submissions of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Progress Financial Corporation's common stock is traded on The Nasdaq
Stock MarketSM under the symbol "PFNC." At December 31, 2001 the Company had
approximately 2,100 holders of record.
Payment of cash dividends is subject to regulatory restrictions as
described in Note 18 of Notes to Consolidated Financial Statements. The Company
paid cash dividends on a quarterly basis totaling $.12 per share for the first
two quarters of 2001 and $.21 per share during 2000.
The following table sets forth the high and low closing prices, trading
volumes and cash dividends per share paid for the periods described. Prior
periods have been restated to reflect the 5% stock dividend distributed to
shareholders on August 31, 2000.
2001 2000
------------------------------------- -----------------------------------------
Low High Volume Dividends Low High Volume Dividends
------------------------------------- -----------------------------------------
First Quarter $7.06 $9.63 1,057,900 $.06 $10.42 $12.26 1,299,000 $.05
Second Quarter 6.88 8.40 819,500 .06 10.12 11.84 933,000 .05
Third Quarter 5.60 7.94 629,200 -- 11.19 12.62 657,000 .05
Fourth Quarter 5.90 7.60 485,300 -- 7.13 10.75 861,000 .06
10
Item 6. Selected Consolidated Financial Data
Tabular information is presented in thousands of dollars except for share and
per share data. This data should be read in conjunction with the Notes to
Consolidated Financial Statements.
December 31, 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Financial Condition
Investment and mortgage-backed securities:
Available for sale $211,828 $205,166 $149,518 $164,368 $50,913
Held to maturity 38,173 41,940 34,309 12,401 53,472
Loans and leases, net 495,025 535,712 497,738 394,246 339,903
Loans held for sale 25,587 -- -- 25,250 373
Real estate owned, net 1,533 1,750 66 -- 380
Total assets 851,380 914,249 768,941 648,198 508,919
Deposits 629,523 617,543 521,439 408,162 344,322
Borrowings and subordinated debt 140,568 194,360 162,767 167,416 84,247
Capital securities 20,260 20,232 14,451 14,431 14,400
Shareholders' equity 50,599 50,160 47,809 41,554 25,362
Results of Operations
Interest income $ 64,985 $ 67,028 52,174 $ 45,329 $36,497
Interest expense 33,372 35,175 25,432 22,450 17,894
Net interest income 31,613 31,853 26,742 22,879 18,603
Provision for loan and lease losses 7,116 4,416 3,548 959 1,509
Net interest income after provision for loan and lease 24,497 27,437 23,194 21,920 17,094
losses
Non-interest income 16,111 19,542 17,587 7,645 5,950
Non-interest expense 39,563 38,306 31,648 21,834 17,332
Income from continuing operations before income taxes,
extraordinary loss and cumulative effect of accounting
change 1,045 8,673 9,133 7,731 5,712
Tax expense (benefit) 302 3,016 3,101 2,816 2,230
Income from continuing operations before extraordinary loss
and cumulative effect of accounting change 743 5,657 6,032 4,915 3,482
Gain on sale of discontinued operations, net of tax -- 1,519 -- -- --
Income from discontinued operations, net of tax -- 123 639 111 (15)
Income before extraordinary loss and cumulative effect of
accounting change 743 7,299 6,671 5,026 3,467
Extraordinary loss, net of tax benefit (199) -- -- -- --
Cumulative effect of accounting change, net of tax benefit -- -- -- (46) --
Net income 544 7,299 6,671 4,980 3,467
Per Share Data
Basic income from continuing operations per common share
before extraordinary loss and cumulative effect of
accounting change $ .13 $ .98 $ 1.04 $ .92 $ .74
Diluted income from continuing operations per common
share before extraordinary loss and cumulative effect of
accounting change .13 .95 .99 .84 .68
Basic net income per common share .10 1.26 1.15 .93 .74
Diluted net income per common share .10 1.22 1.10 .85 .68
Dividends .12 .21 .17 .12 .08
Book value 9.11 8.82 8.26 7.45 5.35
Operating Data
Return on average assets .06% .88% .98% .89% .80%
Return on average shareholders' equity 1.04 15.16 15.47 13.78 15.22
Average shareholders' equity to average assets 5.82 5.78 6.33 6.42 5.23
Allowance for loan and lease losses to total loans and 1.87 1.36 1.18 1.06 1.12
leases
Non-performing assets as a percentage of total assets 1.28 .63 .75 .57 .50
Interest rate spread 3.18 3.50 3.63 3.66 3.98
Net interest margin 3.79 4.17 4.24 4.32 4.58
Dividends declared as a percent of net income per share 120.00 17.21 15.45 14.12 11.76
Banking Office Data
Number of full service banking offices 20 16 14 11 10
11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Progress Financial Corporation (the "Company") is a unitary thrift
holding company that has six primary subsidiaries: Progress Bank (the "Bank"),
Progress Capital, Inc. ("PCI"), KMR Management, Inc. ("KMR"), Progress
Development Corp. ("PDC"), Progress Financial Resources, Inc. ("PFR") and
Progress Capital Management, Inc. ("PCM"). The Bank's primary operating
subsidiaries are Progress Leasing Company ("PLC") and Progress Realty Advisors,
Inc. ("PRA").
The following discussion and analysis of financial condition and
results of operations should be read in conjunction with the Company's
Consolidated Financial Statements and accompanying notes. Certain
reclassifications have been made to prior years' data throughout the following
discussion and analysis for comparability with 2001 data.
When used in filings by the Company with the Securities and Exchange
Commission, in the Company's press releases or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result", "are expected to",
"will continue", "is anticipated", "estimate", "project", or similar expressions
are intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties including changes in economic conditions in the
Company's market area, changes in policies by regulatory agencies, fluctuations
in interest rates, demand for loans in the Company's market area and competition
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made. The Company wishes to advise readers that
the factors listed above could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from any opinions or statements expressed with respect to future periods in any
current statements. These factors influence the Company's most critical
accounting policy, "Allowance for Loan and Lease Losses" and the related
"Provision for Possible Loan and Lease Losses," which are further discussed on
pages 13, 24 and 34 of this Form 10-K.
Results of Operations
The Company reported net income of $544,000 for the year ended December
31, 2001, in comparison with $7.3 million and $6.7 million for the years 2000
and 1999, respectively. The basic net income per common share was $.10 for 2001,
$1.26 for 2000 and $1.15 for 1999. Fully diluted net income per common share was
$.10 for 2001, $1.22 for 2000 and $1.10 for 1999. Income from continuing
operations was $743,000 for the year ended December 31, 2001, in comparison with
$5.7 million and $6.0 million for the years 2000 and 1999, respectively. During
the fourth quarter of 2001, the Company paid off $10.0 million of long-term
Federal Home Loan Bank borrowings resulting in an extraordinary loss on the
early extinguishment of debt of $301,000 pretax, $199,000 net of tax, or diluted
earnings per share of $.03. During the second quarter of 2000, the Company sold
the assets of Procall Teleservices, Inc., its teleservices operations, resulting
in a gain of $2.5 million pretax, $1.5 million net of tax, or diluted earnings
per share of $.25. Return on average shareholders' equity was 1.04% and return
on average assets was .06% for the year ended December 31, 2001. For 2000,
return on average shareholders' equity was 15.16% and return on average assets
was .88%. Return on average shareholders' equity was 15.47% and return on
average assets was .98% for 1999.
Net Interest Income
Net interest income on tax-equivalent basis remained level at $32.1
million for 2001, in comparison with $32.2 million for 2000. Although there was
a $15.1 million increase in the positive variance between average
interest-earning assets and average interest-bearing liabilities resulting from
higher volumes in mortgage-backed securities partially offset by increased
deposit volume, this was offset by the reduction in the net interest margin. The
net interest margin was 3.79% for 2001 compared to 4.17% for 2000. The margin
has been compressed by an environment of unprecedented decreases in short-term
rates during 2001 of 475 basis.
Net interest income on a tax-equivalent basis increased to $32.2
million for 2000, in comparison with $26.9 million for 1999. This was primarily
due to a $15.0 million increase in the positive variance between average
interest-earning assets and average interest-bearing liabilities resulting from
higher volumes in commercial business loans, commercial real estate loans, lease
financing receivables and investments which were partially offset by increased
time deposit volume and short-term borrowings. The net interest margin was 4.17%
for 2000 compared to 4.24% for 1999; the slight decline was primarily due to
higher deposit rates in 2000 partially offset by higher yields on commercial
business loans, construction loans and investments in 2000.
12
Provision for Loan and Lease Losses
The provision for loan and lease losses represents the charge against
earnings that is required to fund the allowance for loan and lease losses. The
level of the allowance is determined by known and inherent risks within the
Bank's loan and lease portfolio. Management's periodic evaluation is based upon
an examination of the portfolio, past loss experience, current economic
conditions and other relevant factors.
The provision for loan and lease losses amounted to $7.1 million in
2001 compared to $4.4 million in 2000. The increase was undertaken primarily due
to increases in classified loans, the level of charge-offs, non-performing
assets and continued economic concerns.
The provision for loan and lease losses amounted to $4.4 million in
2000 compared to $3.5 million in 1999. The increase was primarily due to loan
growth and to increase the reserve coverage as a result of the economic climate.
The ratio of the allowance for loan and lease losses to total
non-performing loans and leases was 106.28%, 183.61% and 103.96% at December 31,
2001, 2000 and 1999, respectively.
Although management utilizes its best judgment in providing for loan
and lease losses, there can be no assurance that the Bank will not have to
increase its provision for loan and lease losses in the future as a result of
adverse market conditions for real estate in the Bank's primary market area,
future increases in non-performing loans and leases, or for other reasons. Any
such increase could adversely affect the Bank's results of operations. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan and lease losses and
the carrying value of its other non-performing assets. Such agencies may require
the Bank to recognize additions to its allowance for losses based on their
judgements of information available to them at the time of their examination.
The Company and the Bank were most recently examined by the Office of Thrift
Supervision ("OTS") as of December 31, 2001.
Non-interest Income
Non-interest income decreased to $16.1 million in 2001, compared to
$19.5 million in 2000. This decrease was primarily due to the recognition of a
$1.9 million loss from client warrants during 2001 compared with a gain of $3.5
million during 2000, financial services fee income which decreased $1.2 million
and a gain on the sale of the Maryland-based leasing division of $1.7 million
during 2000 partially offset by gain on sale of securities which increased $2.3
million and loss in unconsolidated entities which decreased $2.2 million.
The Company recognized a loss of $1.9 million from client warrants
during the first quarter of 2001 due to the permanent impairment of equity
securities of U. S. Interactive, Inc. (USIT) received from warrants. USIT filed
for protection under the bankruptcy court during the first quarter of 2001. The
$1.9 million loss represents the amount which was previously included in client
warrant income during the first quarter of 2000 related to market appreciation
on these same warrants recorded in accordance with FASB 133.
The Company had previously obtained rights to acquire stock (in the
form of warrants) in certain clients as part of negotiated credit facilities.
The receipt of warrants did not change the loan covenants or other collateral
control techniques employed by the Company to mitigate the risk of a loan
becoming non-performing, and collateral requirements on loans with warrants were
similar to lending arrangements where warrants were not obtained. Additional
information on warrants held by the Company can be found under "Business--
Banking-TechBanc."
Mutual fund, annuity and insurance commissions decreased $1.5 million
from the Company's subsidiary PFR. Loan, brokerage and advisory fees decreased
$874,000 from the Company's subsidiary PRA. Partially offsetting these decreases
were consulting fees generated by the Company's subsidiary KMR which increased
$1.0 million.
Gain on sale of securities increased $2.3 million during 2001 primarily
due to increased sale and purchase activity related to the change in the
financial markets and included a $708,000 gain on the disposition of the
Company's investment in NewSeasons Assisted Living Communities Series B and C
stock.
The loss in unconsolidated entities of $634,000 in 2001 primarily
relates to a loss on its investment in the NewSpring Ventures capital fund of
which the Company owned 20% and was accounted for under the equity method. In
December 2001, the Company recorded a gain on the sale of investments in
unconsolidated entities of $802,000. The Company's subsidiary, PCI, sold its
limited partnership interest in the NewSpring Ventures capital fund resulting in
a gain of $964,000 representing the amount by which the Company had previously
written down its investment. The Company's subsidiary, PDC, sold its
13
interest in Progress Development I, L.P. resulting in a loss of $162,000.
Additional information can be found under "Business-- Private Equity Fund
Management and Other Activities."
Non-interest income increased to $19.5 million in 2000 compared to
$17.6 million in 1999. This increase was primarily due to a $4.9 million
increase in financial services fee income and a $1.7 million gain on the sale of
the Maryland-based leasing division partially offset by a $5.3 million decrease
in equity in unconsolidated entities.
Private equity fund management fees increased $1.5 million primarily
generated by the Company's subsidiary PCM. Mutual fund, annuity and insurance
commissions increased $1.9 million from the Company's subsidiary PFR. Consulting
fees of $963,000 were generated during 2000 by the Company's subsidiary KMR.
In December 2000, the Company sold the assets of its Maryland-based
leasing division that resulted in the sale of $31.0 million of lease financing
receivables and a gain of $1.7 million.
The losses in unconsolidated entities of $2.8 million in 2000 primarily
relate to the Ben Franklin mezzanine debt fund and NewSpring Ventures capital
fund of which the Company owned approximately 36% and 20%, respectively, and
which were accounted for under the equity method. These losses represent a
partial reversal of unrealized gains reported in the third and fourth quarters
of 1999.
The Company recognized $3.5 million of client warrant income during
2000 due to the expiration of restrictions on the sale of warrants to acquire
common stock of Internet Capital Group, Inc. (ICGE), USIT and EMAX Solutions
Partners, Inc. The Company recognized client warrant income of $1.1 million from
the sale of and market value adjustments on shares of ICGE; $2.0 million from
market value adjustments on USIT warrants and $340,000 was on the sale of EMAX
warrants back to SciQuest.com in accordance with the terms of the acquisition of
EMAX by SciQuest.com.
A gain on sale of securities of $603,000 was recorded during 2000 from
the sale of 49,412 shares (adjusted for a 2-for-1 split) of common stock of ICGE
which the Company acquired through an investment in a convertible note of ICGE
made by it venture capital subsidiary.
Non-interest Expense
Non-interest expense for 2001 amounted to $39.6 million compared to
$38.3 million in 2000. Excluding non-recurring expenses of $1.1 million in 2001
and non-recurring expenses of $626,000 in 2000, non-interest expense increased
$799,000. The non-recurring expenses for 2001 primarily included write-offs
related to PLC, including a goodwill write-off of $440,000 and a write-down of
used asset inventory for $422,000. Non-recurring expenses for 2000 included a
write-down of goodwill associated with the AMIC Division of PRA of $373,000 and
data processing conversion costs of $253,000. Professional services expenses
increased $1.2 million primarily due to the business activities of KMR and legal
expenses related to loans to pre-profit companies. Occupancy expense increased
$239,000 in 2001 mainly due to the establishment of four new banking offices.
Capital securities expense increased $371,000 due to the issuance of $6.0
million of 11.445% capital securities in July 2000. Salaries and employee
benefits decreased $1.0 million in 2001 mainly due to lower commission expense
for PFR.
Non-interest expense for 2000 amounted to $38.3 million compared to
$31.6 million in 1999. Excluding non-recurring expenses of $253,000 during 2000
related to data system conversion costs, a $373,000 write-down of goodwill
during 2000 related to the sale of offices of the AMIC Division of PRA, and $1.1
million in 1999 associated with a leasing acquisition and unrelated adjustments,
non-interest expense increased $7.1 million. This increase was partially due to
a $4.3 million increase in salaries and employee benefits as a result of
additional employees to staff new banking offices, the acquisition of KMR, the
staffing of PCM, commissions at PFR and from other new positions established
within the Company. Occupancy and furniture, fixtures and equipment expenses
increased $1.5 million mainly due to a new operations center, bringing data
processing in-house and new bank office openings. Professional services expense,
excluding $31,000 in data system conversion related expenses in 2000, increased
$492,000 primarily due to consulting costs associated with the business
generated by the Company's subsidiaries PCM and KMR and legal costs associated
with aggressive collection efforts on charged-off loans and leases. Real estate
owned expenses increased $287,000 primarily due to construction management and
legal expenses related to residential real estate development projects,
classified as real estate owned. Loan expenses increased $221,000 primarily due
to lease financing broker fees. Capital securities expense increased $312,000
due to the issuance of $6.0 million of 11.455% capital securities in July 2000.
14
Income Tax Expense
The Company recorded income tax expense from continuing operations of
$302,000 during 2001 compared to $3.0 million in 2000 and $3.1 million in 1999.
Income tax benefit from the extraordinary loss on early extinguishment of debt
was $102,000 during 2001. Income tax expense from the gain on sale of and income
from discontinued operations was $1.1 million during 2000. Income tax expense on
income from discontinued operations was $442,000 in 1999. The changes in income
tax expense were primarily due to changes in taxable income.
Liquidity and Funding
The Company must maintain sufficient liquidity to meet its funding
requirements for loan and lease commitments, scheduled debt repayments,
operating expenses, and deposit withdrawals. The Bank is the primary source of
working capital for the Company. At December 31, 2001, the Bank met all
regulatory capital liquidity requirements.
The Company's need for liquidity is affected by loan demand and net
changes in retail deposit levels. The Company can minimize the cash required
during the times of heavy loan demand by modifying its credit policies or
reducing its marketing efforts. Liquidity demand caused by net reductions in
retail deposits is usually caused by factors over which the Company has limited
control. The Company derives its liquidity from both its assets and liabilities.
Liquidity is derived from assets by receipt of interest and principal payments
and prepayments, by the ability to sell assets at market prices and by utilizing
unpledged assets as collateral for borrowings. Liquidity is derived from
liabilities by maintaining a variety of funding sources, including retail
deposits, FHLB borrowings and securities sold under agreement to repurchase.
At December 31, 2001, the total of approved loan commitments amounted
to $23.3 million, and the Company had $156.1 million of undisbursed loan funds.
At December 31, 2001, the amount of time deposits that are scheduled to mature
within 12 months totaled $280.1 million, a substantial portion of which
management believes, on the basis of prior experience, will remain in the
Company.
Deposits are obtained primarily from residents near the Bank's ten
full-service offices in Montgomery County, one full-service office in Rosemont,
Delaware County, two full-service offices in Chester County, four full-service
offices in Bucks County, two full-service offices in Philadelphia County and one
full-service office in Lambertville, Hunterdon County, New Jersey. The Bank has
drive-up banking facilities at thirteen of its offices and has installed ATM's
at all of its offices and at four additional locations. The Bank offers a wide
variety of options to its customer base, including consumer and commercial
demand deposit accounts, negotiable order of withdrawal ("NOW") accounts, money
market accounts, passbook accounts, certificates of deposit and retirement
accounts.
As a member of the FHLB, the Bank is required to own capital stock in
the FHLB and is authorized to apply for advances on the security of such stock
and certain of its home mortgages and other assets (principally securities which
are obligations of, or guaranteed by, the United States), provided certain
standards related to creditworthiness have been met. Advances are made pursuant
to several different credit programs. Each credit program has its own interest
rate and range of maturities. Depending on the program, limitations on the
amount of advances are based either on a fixed percentage of a savings bank's
assets or on the FHLB's assessment of the savings bank's creditworthiness. The
FHLB credit policies may change from time to time at its discretion. The Bank's
maximum borrowing authority from the FHLB on December 31, 2001 was approximately
$271.0 million.
The Company's primary sources of funds have historically consisted of
deposits, amortization and prepayments of outstanding loans, FHLB borrowings and
securities sold under agreement to repurchase and sales of investment and
mortgage-backed securities. During 2001, the Company used its working capital
primarily to meet its ongoing commitments to fund existing and continuing loan
commitments, repay short-term debt, fund deposit withdrawals and maintain its
liquidity. During 2000, the Company used its capital resources primarily to meet
its ongoing commitments to fund existing and continuing loan commitments, fund
deposit withdrawals and maintain its liquidity. For the year ended December 31,
2001, cash was used in operating activities primarily for the payment of other
liabilities including a trade-date accounting entry for the purchase of
mortgage-backed securities. Cash was provided by investing activities primarily
due to the sales of and repayments on mortgage-backed securities, partially
offset by purchases of mortgage-backed securities. Cash was used in financing
activities during 2001 primarily due to a net decrease in short-term borrowings.
For the year ended December 31, 2000, cash was provided by operating activities.
Cash was used in investing activities as purchases of mortgage-backed and
investment securities, and net originations of loans exceeded repayments and
proceeds from sales, maturities and calls of mortgage-backed and investment
securities and proceeds from sales of loans, lease receivables and the
Maryland-based leasing division. Cash provided by financing activities during
2000, primarily due to increases in deposits, offset the outflows from
investments
15
activities. For the year ended December 31, 1999, cash was provided by operating
activities. Cash was used in investing activities primarily due to net
origination of loans. Cash provided by financing activities, primarily due to
increases in time deposits, offset the outflows from investment activities.
Office of Thrift Supervision Directive
During July 2001, the Company's Board of Directors approved a
resolution to comply with the terms of a directive issued by the Office of
Thrift Supervision ("OTS") that requires the Bank to (i) reduce its lending to
early stage technology companies; (ii) increase its leverage capital ratio to no
less than 8.0% and its total risk-basked capital ratio to no less than 14.0% by
April 1, 2002 through gradual compliance; (iii) increase its valuation allowance
and implement improved credit review and monitoring programs and (iv) beginning
on March 31, 2002, the Bank's classified assets-to-capital ratio shall not
exceed 20% through gradual compliance. In addition, the Company will not pay
cash dividends on its capital stock until the Bank achieves the required capital
levels and has implemented an acceptable capital plan. As such, the Company has
suspended the quarterly cash dividend on its common stock and its stock
repurchase program and has undertaken measures to achieve capital compliance as
promptly as possible. The increased capital levels reflect the Bank's level of
business lending particularly in the technology sector and continued economic
concerns. As of December 31, 2001 the Bank was in compliance with the terms of
the OTS Directive.
On February 7, 2002 the OTS approved the Company's revised Capital
Enhancement Plan and agreed to extend the dates that the Bank must comply with
the targeted ratio of classified assets to capital. As revised, the Bank's
classified assets to capital ratio must not exceed 25% on June 30, 2002 and must
not exceed 20% on September 30, 2002. At December 31, 2001, the Bank's
classified assets to capital ratio was approximately 36.0%. The Bank is working
aggressively to reduce the ratio and comply with the terms of the directive; but
there can be no assurance that the Bank will be in compliance with these
requirements on such dates. Failure to comply with such ratios could result in
the OTS taking further regulatory action.
Capital Resources
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was signed into law on December 19, 1991; regulations implementing
the prompt corrective action provision of FDICIA became effective on December
19, 1992. In addition to the prompt corrective action requirements, FDICIA
includes significant changes to the legal and insured depository institutions,
including reductions in insurance coverage for certain kinds of deposits,
increased supervision by the federal regulatory agencies, increased reporting
requirements for insured institutions, and new regulations concerning internal
controls, accounting, and operations. The prompt corrective action regulations
defined specific capital categories based on an institution's capital ratios.
The capital categories, in declining order, are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." To be considered "well capitalized," an
institution must generally have a tangible equity ratio of at least 2%, a Tier 1
or leverage capital ratio of at least 5%, a Tier 1 risk-based capital ratio of
at least 6%, and a total risk-based capital ratio of at least 10%. An
institution is deemed to be "critically undercapitalized" if it has a tangible
equity ratio of 2% or less. Under the OTS directive discussed above, the Bank
must increase its leverage capital ratio to no less than 8.0% and its total
risk-based capital ratio to no less than 14.0% by April 1, 2002 through gradual
compliance.
At December 31, 2001, the Bank met all regulatory capital requirements.
At December 31, 2001, the Bank's leverage capital ratio was 7.90%, Tier 1
risk-based capital ratio was 11.60%, total risk-based ratio was 12.85% and
tangible equity ratio was 7.88%, based on leverage capital of $66.4 million,
Tier 1 risk-based capital of $66.4 million, total risk-based capital of $73.4
million, and tangible capital of $66.2 million, respectively. As of December 31,
2001, the Bank is classified as "well capitalized."
In July 2000, the Company issued 6,000 shares, or $6.0 million, of
11.445% trust preferred securities, $1,000 liquidation amount per security, due
July 19, 2030 (the "Trust Preferred Securities"), in a private offering managed
by First Union Securities, Inc. The Trust Preferred Securities represent
undivided beneficial interests in Progress Capital Trust II (the "Trust II"), a
statutory business trust created under the laws of Delaware, which was
established by the Company for the purpose of issuing the Trust Preferred
Securities. The Company has fully, irrevocably and unconditionally guaranteed
all of the Trust II's obligations under the Trust Preferred Securities. Net
proceeds from the sale of the securities were used for general purposes,
including but not limited to, capital contributions to the Bank to fund its
growth and for repurchases of the Company's common stock under its existing
stock repurchase program.
During 1997 the Company issued $15.0 million of 10.5% capital
securities due June 1, 2027 (the "Capital Securities"). The Capital Securities
were issued by the Company's recently formed subsidiary, Progress Capital Trust
I, a statutory business trust created under the laws of Delaware. The Company is
the owner of all of the common securities of the Trust (the "Common
Securities"). The Trust issued $15.0 million of 10.5% Capital Securities (and
together with the Common
16
Securities, the "Trust Securities"), the proceeds from which were used by the
Trust, along with the Company's $464,000 capital contribution for the Common
Securities, to acquire $15.5 million aggregate principal amount of the Company's
10.5% Junior Subordinated Deferrable Interest Debentures due June 1, 2027 (the
"Debentures"), which constitute the sole assets of the Trust. The Company has,
through the Declaration of Trust establishing the Trust, Common Securities and
Capital Securities Guarantee Agreements, the Debentures and a related Indenture,
taken together, fully irrevocably and unconditionally guaranteed all of the
Trust's obligations under the Trust Securities. The Company contributed
approximately $6.0 million of the net proceeds to Progress Bank, to increase its
regulatory capital ratios and support the growth of the expanded lending
operations. Net proceeds retained by the Company will be used for general
purposes, including investments in other subsidiaries and potential future
acquisitions.
Subsequently, on February 11, 2002, the Company closed a private
placement offering of common stock to accredited investors of 1,153,330 common
shares priced at $7.50 a share, totaling $8.6 million, resulting in net proceeds
of approximately $8.3 million. The Company contributed $4.2 million of the net
proceeds to the Bank to increase its regulatory capital ratios and to position
the Company for strong, solid growth as it continues to focus on community
banking strategy in 2002. The Company is in compliance with the capital targets
set forth in the directive.
Statistical Information
Statistical information is furnished pursuant to the requirements of
Guide 3 (Statistical Disclosure by Bank Holding Companies) promulgated under the
Securities Act of 1933. Tabular information is provided in thousands of dollars
except for share and per share data.
17
Distribution of Average Assets, Liabilities and Shareholders' Equity
The following table sets forth, for the periods indicated,
tax-equivalent information regarding (i) the total dollar amount of interest
income on average interest-earning assets and the resultant average yield; (ii)
the total dollar amount of interest expense on average interest-bearing
liabilities and the resultant average cost; (iii) net interest income; (iv)
interest rate spread; and (v) net interest margin. Information is based on
average daily balances during the indicated periods. For the purposes of this
table, non-accrual loans have been included in the appropriate average balance
category.
For the years ended December 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------------------
Interest-earning assets:
Interest-earning deposits $25,606 $ 945 3.69% 21,244 $1,320 6.21% $16,907 $ 868 5.13%
Securities:
Trading securities -- -- -- 264 -- -- 86 -- --
Taxable investment securities(1) 33,769 2,127 6.30 50,709 3,507 6.92 30,127 1,863 6.18
Tax-exempt investment 14,850 1,156 7.78 14,820 923 6.23 10,068 687 6.82
securities(2)
Mortgage-backed securities (1) 218,012 13,935 6.39 145,056 10,461 7.21 123,786 8,008 6.47
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total securities 266,631 17,218 6.46 210,849 14,891 7.06 164,067 10,558 6.44
Loans:
Commercial business loans(2)(3) 175,959 14,642 8.32 146,332 13,801 9.43 103,934 8,862 8.53
Commercial real estate loans(2)(3) 190,313 16,191 8.51 170,180 14,980 8.80 146,784 12,652 8.62
Construction loans 69,889 6,075 8.69 54,435 5,944 10.92 50,161 5,062 10.09
Single family residential real 31,312 2,633 8.41 39,078 2,991 7.65 45,656 3,329 7.29
estate loans
Consumer loans 40,714 2,994 7.35 37,538 3,049 8.12 31,083 2,449 7.88
Lease financing(2) 45,518 4,750 10.44 93,615 10,446 11.16 76,861 8,600 11.19
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total loans 553,705 47,285 8.54 5 41,178 51,211 9.46 454,479 40,954 9.01
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-earning
assets 845,942 65,448 7.74 7 73,271 67,422 8.72 635,453 52,380 8.24
-------- ------- ----- -------- ------- ----- -------- ------- -----
Non-interest-earning assets:
Cash 16,568 16,762 14,091
Allowance for loan and lease losses (8,956) (6,263) (4,924)
Other assets 42,273 49,535 36,237
-------- -------- --------
Total non-interest-
earning assets 49,885 60,034 45,404
-------- -------- --------
Total assets $895,827 833,305 $680,857
======== ======== ========
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and Super NOW $113,406 2,844 2.51 91,975 3,119 3.39 $79,206 2,195 2.77
Money market accounts 42,382 1,112 2.62 37,223 1,172 3.15 35,649 993 2.79
Passbook and statement savings 28,892 425 1.47 29,752 527 1.77 31,763 603 1.90
Time deposits 364,891 19,016 5.21 329,874 19,344 5.86 248,866 12,968 5.21
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing 549,571 23,397 4.26 488,824 24,16 24.94 395,484 16,759 4.24
deposits
Short-term borrowings 36,513 1,759 4.82 76,515 4,707 6.15 35,340 2,199 6.22
Long-term debt 145,566 8,216 5.64 108,752 6,306 5.80 120,400 6,474 5.38
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities 731,650 33,372 4.56 674,091 35,175 5.22 551,224 25,432 4.61
-------- ------- ----- -------- ------- ----- -------- ------- -----
Non-interest-bearing liabilities:
Non-interest-bearing deposits 77,352 72,626 57,514
Other liabilities 14,440 20,652 14,547
-------- -------- --------
Total non-interest-bearing
liabilities 91,792 93,278 72,061
-------- -------- --------
Total liabilities 823,442 767,369 623,285
Capital securities 20,245 17,795 14,441
Shareholders' equity 52,140 48,141 43,131
-------- -------- --------
Total liabilities, capital
securities and shareholders'
equity $895,827 833,305 $680,857
======== ======== ========
Net interest income $32,076 $32,247 $26,948
======= ======= =======
Interest rate spread (4) 3.18% 3.50% 3.63%
Effect of net interest-free funding
sources(5) .61 .67 .61
----- ----- -----
Net interest margin (6) 3.79% 4.17% 4.24%
====== ====== =====
Average interest-earning assets to
average interest-bearing liabilities 115.6% 114.7% 115.2%
====== ====== =====
(1) Includes investment and mortgage-backed securities classified as available
for sale. Yield information does not give effect to changes in fair values
that are reflected as a component of shareholders' equity.
(2) Interest income and rates are presented on a tax-equivalent basis, assuming
a federal income tax rate of 34%.
(3) Includes loans held for sale.
(4) Represents the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities.
(5) Represents the effect on the net interest margin of the difference between
non-interest-earning assets and non-interest-bearing liabilities, capital
securities and shareholders' equity.
(6) Represents net interest income divided by average interest-earning assets.
18
Rate/Volume Analysis
The following table presents the degree to which changes in the
Company's tax-equivalent interest income, interest expense and net interest
income are attributable to changes in the average amount of interest-earning
assets and interest-bearing liabilities outstanding and/or to changes in rates
earned or paid thereon. The net change attributable to both volume and rate has
been allocated proportionately. Amounts in brackets represent a decrease in
interest income or expense.
--------------------------------------------------------------------------------------------------------
For the years ended December 31, 2001 vs. 2000 2000 vs. 1999
--------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
-------------------------------------------------------------------
Interest-earning assets:
Interest-earning deposits $ 234 ($609) ($375) $248 204 $ 452
Securities:
Trading securities -- -- -- -- -- --
Taxable investment
securities (1,088) (292) (1,380) 1,399 245 1,644
Tax-exempt securities 2 231 233 299 (63) 236
Mortgage-backed securities 4,773 (1,299) 3,474 1,473 980 2,453
------ ----- ------ ----- ----- ------
Total securities 3,687 (1,360) 2,327 3,171 1,162 4,333
Loans:
Commercial business 2,586 (1,745) 841 3,925 1,014 4,939
Commercial real estate
loans 1,720 (509) 1,211 2,059 269 2,328
Construction loans 1,488 (1,357) 131 449 433 882
Single family residential
real estate loans (635) 277 (358) (496) 158 (338)
Consumer loans 247 (302) (55) 523 77 600
Lease financing (5,061) (635) (5,696) 1,869 (23) 1,846
------ ----- ------ ----- ----- ------
Total loans 345 (4,271) (3,926) 8,329 1,928 10,257
--------------------------------------------------------------------------------------------------------
Interest income 4,266 (6,240) (1,974) 11,748 3,294 15,042
--------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
NOW and Super NOW 636 (911) (275) 387 537 924
Money market accounts 151 (211) (60) 46 133 179
Passbook and statement
savings (15) (87) (102) (37) (39) (76)
Time deposits 1,937 (2,265) (328) 4,609 1,767 6,376
------ ----- ------ ----- ----- ------
Total deposits 2,709 (3,474) (765) 5,005 2,398 7,403
Short-term borrowings (2,085) (863) (2,948) 2,533 (25) 2,508
Long-term debt 2,088 (178) 1,910 (653) 485 (168)
--------------------------------------------------------------------------------------------------------
Interest expense 2,712 (4,515) (1,803) 6,885 2,858 9,743
--------------------------------------------------------------------------------------------------------
Net interest income $ 1,554 ($1,725) ($ 171) $ 4,863 436 $5,29
========================================================================================================
Investment and Mortgage-Backed Securities
Investment and mortgage-backed securities are comprised of the
following at December 31, 2001, 2000 and 1999:
Held to Maturity Available for Sale
-----------------------------------------------
Amortized Estimated Amortized Estimated
December 31, 2001 Cost Fair Value Cost Fair Value
----------------------------------------------------------------------------------------------------
FHLB stock $ 6,500 $ 6,500 $ -- $ --
U.S. agency obligations 16,808 16,719 2,770 2,774
Bank deposits -- -- 440 440
Corporate bonds -- -- 1,919 1,545
Municipal bonds 14,865 14,801 -- --
Equity investments -- -- 1,923 1,923
Mortgage-backed securities -- -- 205,741 205,146
----------------------------------------------------------------------------------------------------
Total investment and mortgage-backed securities $ 38,173 $ 38,020 $212,793 $211,828
====================================================================================================
19
Held to Maturity Available for Sale
--------------------------------------------------
Amortized Estimated Amortized Estimated
December 31, 2000 Cost Fair Value Cost Fair Value
- --------------------------------------------------------------------------------------------------------------------
FHLB stock $ 6,350 $ 6,350 $ -- $ --
U.S. agency obligations 20,755 19,230 16,524 16,687
Bank deposits -- -- 447 447
Corporate bonds -- -- 1,913 1,570
Municipal bonds 14,835 14,645 -- --
Equity investments -- -- 5,436 2,994
Mortgage-backed securities -- -- 183,475 183,468
- --------------------------------------------------------------------------------------------------------------------
Total investment and mortgage-backed securities $41,940 $40,225 $207,795 $205,166
====================================================================================================================
Held to Maturity Available for Sale
--------------------------------------------------
Amortized Estimated Amortized Estimated
December 31, 1999 Cost Fair Value Cost Fair Value
- --------------------------------------------------------------------------------------------------------------------
FHLB stock $ 4,923 $ 4,923 $ -- $ --
U.S. agency obligations 14,581 14,255 17,107 16,777
Corporate bonds -- -- 1,900 1,693
Municipal bonds 14,805 13,736 -- --
Equity investments -- -- 4,564 12,162
Mortgage-backed securities -- -- 123,958 118,886
- --------------------------------------------------------------------------------------------------------------------
Total investment and mortgage-backed securities $34,309 $32,914 $147,529 $149,518
====================================================================================================================
The following table sets forth the contractual maturities of the
investment and mortgage-backed securities at December 31, 2001 by investment
type and the weighted average yield for each range of maturities. The yield on
municipal bonds is calculated on a tax-equivalent basis.
US
Government Business Weighted
Agencies Corporations Municipalities Total Average Yield
- ------------------------------------------------------------------------------------------------------------------------
Available for sale:
Due one year or less $ 1,770 $ 450 $ -- $ 2,220 2.29%
Due after one year through 5 years 1,004 -- -- 1,004 6.05
Due after 5 years through 10 years -- -- -- -- --
Due after 10 years -- 1,535 -- 1,535 3.03
Mortgage-backed securities 205,146 -- -- 205,146 6.93
Equity securities -- 1,923 -- 1,923 .22
- ------------------------------------------------------------------------------------------------------------------------
Total available for sale $ 207,920 $3,908 $ -- $211,828 6.79%
========================================================================================================================
Held to maturity:
Due after 5 years through 10 years $ -- $ -- $ 787 $ 787 6.83%
Due after 10 years 16,808 -- 14,078 30,886 7.27
FHLB stock 6,500 -- -- 6,500 5.75
- ------------------------------------------------------------------------------------------------------------------------
Total held for sale $ 23,308 $ -- $14,865 $ 38,173 7.00%
========================================================================================================================
Loan and Lease Portfolio
The principal categories in the Company's loan and lease portfolio are
commercial business loans; commercial real estate loans, which are secured by
multi-family (over five units) residential and commercial real estate; loans for
the construction of single-family, multi-family and commercial properties,
including land acquisition and development loans; residential real estate loans,
which are secured by single-family (one to four units) residences; consumer
loans; and lease financing. Substantially all of the Company's mortgage loan
portfolio consists of conventional mortgage loans, which are loans that are
neither insured by the Federal Housing Administration nor partially guaranteed
by the Department of Veterans Affairs.
20
The Company's net loan and lease portfolio, including loans held for
sale, totaled $520.6 million at December 31, 2001 or 61.1% of its total assets,
a decrease of $15.1 million or 2.8% from the $535.7 million outstanding at
December 31, 2000.
The following table depicts the composition of the Company's loan and
lease portfolio, net of unearned income, at December 31 for the years indicated:
At December 31, 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------------------------------------------------------------------------------------------------------
Commercial business(1) $146,844 27.68% $175,972 32.40% $119,807 23.79% $ 92,737 21.87% $ 69,312 20.14%
Commercial real
estate(2) 197,394 37.21 178,874 32.93 162,588 32.28 134,380 31.69 109,938 31.94
Construction 77,380 14.58 60,172 11.08 58,813 11.68 44,546 10.51 26,695 7.76
Single family 5.00
residential mortgage(3) 26,518 34,676 6.39 40,554 8.05 50,086 11.81 56,565 16.44
Consumer loans 44,821 8.45 37,242 6.86 34,918 6.93 28,738 6.78 25,557 7.43
Lease financing 37,572 7.08 56,183 10.34 86,985 17.27 73,499 17.34 56,072 16.29
------------------------------------------------------------------------------------------------------
Total loans and
leases 530,529 100.00% 543,119 100.00% 503,665 100.00% 423,986 100.00% 344,139 100.00%
====== ====== ====== ====== ======
Allowance for loan and
Lease losses (9,917) (7,407) (5,927) (4,490) (3,863)
-------- ------- -------- -------- --------
Net loans and
leases $520,612 $535,712 $497,738 $419,496 $340,276
======== ======== ======== ======== ========
(1) Includes $23.3 million of loans classified as held for sale at December 31,
2001.
(2) Includes $2.3 million and $25.3 million of loans classified as held for
sale at December 31, 2001 and 1998, respectively.
(3) Includes $373,000 of loans classified as held for sale at December 31, 1997.
The following table sets forth the scheduled contractual maturities of
the Company's commercial loans at December 31, 2001. The following table also
sets forth the dollar amount of commercial loans scheduled to mature after one
year which have fixed or adjustable rates. Loans held for sale are included in
the one year or less category.
- ------------------------------------------------------------------------------------------------------
Commercial Commercial
At December 31, 2001 Mortgage Construct Business
- ------------------------------------------------------------------------------------------------------
Amounts due:
One year or less $ 18,432 $48,959 $ 87,305
After one year through five years 39,102 28,421 44,773
Beyond five years 139,860 -- 14,766
- ------------------------------------------------------------------------------------------------------
Total $197,394 $77,380 $146,844
======================================================================================================
Interest rate terms on amounts due after one year:
Fixed $ 84,642 $ -- $ 25,885
- ------------------------------------------------------------------------------------------------------
Adjustable $ 94,320 $28,421 $ 33,654
- ------------------------------------------------------------------------------------------------------
Scheduled contractual principal repayments do not reflect the actual
maturities of commercial loans. The average maturity of commercial loans is less
than their average contractual terms because of prepayments and refinancings.
The average life of mortgage loans tends to increase when current mortgage loan
rates are higher than rates on existing mortgage loans and, conversely, decrease
when rates on existing mortgages are lower than current mortgage loan rates (due
to refinancing of adjustable-rate and fixed-rate loans at lower rates). Under
the circumstances, the weighted average yield on loans decreases as higher
yielding loans are paid or refinanced at lower rates.
Risk Elements
The following table details the Company's underperforming assets at
December 31 for the years indicated:
- --------------------------------------------------------------------------------------------------------------
At December 31, 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Loans and leases accounted for on a non-accrual basis $ 9,331 $ 4,034 $5,701 $3,683 2,179
REO, net of related reserves 1,533 1,750 66 -- 380
- --------------------------------------------------------------------------------------------------------------
Total non-performing assets 10,864 5,784 5,767 3,683 2,559
Accruing loans 90 or more days past due 1,125 4,502 2,336 4,030 2,721
- --------------------------------------------------------------------------------------------------------------
Total underperforming assets $11,989 $10,286 $8,103 $7,713 5,280
- --------------------------------------------------------------------------------------------------------------
Non-performing assets as a percentage of net loans and leases
and real estate owned 2.08% 1.08% 1.16% .88% .75%
==============================================================================================================
Non-performing assets as a percentage of total assets 1.28% .63% .75% .57% .50%
==============================================================================================================
Underperforming assets as a percentage of net loans and
leases and real estate owned 2.30% 1.91% 1.63% 1.84% 1.55%
==============================================================================================================
Underperforming assets as a percentage of total assets 1.41% 1.13% 1.05% 1.19% 1.04%
==============================================================================================================
21
Gross interest income that would have been recorded during 2001, 2000
and 1999 if the Company's non-accrual loans and leases at the end of such
periods had been performing in accordance with their terms during such periods
was $811,000, $351,000 and $637,000, respectively. The amount of interest income
that was actually recorded during 2001, 2000 and 1999 with respect to such
non-accrual loans and leases amounted to approximately $429,000, $175,000 and
$426,000, respectively.
The $9.3 million of non-accrual loans and leases at December 31, 2001
consists of $556,000 of loans secured by first liens on single-family
residential property, $512,000 of loans secured by commercial property, $6.6
million of commercial business loans (of which $2.9 million were loans to
pre-profit companies), $421,000 of consumer loans and $1.1 million of lease
financing. The largest underperforming customer had an aggregate non-accrual
loan balance of $3.3 million that was participated to the Bank, secured by
accounts receivable and business assets. The customer has been current in its
payments to the Bank but has been identified by Shared National Institutional
Credit as a non-accrual credit at the lead bank. The second largest
underperforming customer had an aggregate non-accrual loan balance of $2.1
million, secured by accounts receivable and business assets. While both
customers continue to make payments, the ultimate collectibility of all
principal and interest is uncertain.
The accrual of interest on commercial loans, mortgage loans and leases
is generally discontinued when the loans and leases become 90 days past due and
when, in management's judgement, it is determined that a reasonable doubt exists
as to collectibility. The accrual of interest is also discontinued on
residential and consumer loans when such loans become 90 days past due, except
for those loans in the process of collection which are secured by cash
collateral or by real estate with a loan to value less than 75% for first
mortgage loans and less than 60% for second mortgage loans. When a loan is
placed on non-accrual status, interest accruals cease and uncollected accrued
interest is reversed and charged against current income. Additional interest
collected on such loans is recorded as a contra against the principal balance
and only recorded into interest income if the loan is returned to an accruing
status. A loan remains on non-accrual status until the factors which indicate
doubtful collectibility no longer exist, or the loan is liquidated, or when the
loan is determined to be uncollectible and is charged-off against the allowance
for loan losses.
All loans and leases are reviewed on a regular basis and are placed on
non-accrual status when, in the opinion of management, the collection of
additional interest is deemed insufficient to warrant further accrual. In
addition to the loans classified as underperforming at December 31, 2001, other
loans with a total principal balance of $7.1 million were identified by
management to be possible problem loans. While these borrowers are in compliance
with present repayment terms, their financial conditions have caused management
to believe that their loans may result in classification as past due or
non-accrual at some future time. These loans have been considered in the
recognition of impaired loans described below.
In 1995, the Company adopted the provisions of SFAS 114, "Accounting by
Creditors for Impairment of a Loan" as amended by SFAS 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures." Under
the Company's credit policy, all loans, except for leases, residential
mortgages, and consumer loans, are subject to impairment recognition on a
monthly basis. A loan is considered impaired when it is probable that all
principal and interest due under the contractual terms of a loan will not be
collected. The Company generally considers most loans 90 days or more past due
and all non-accrual loans to be impaired. Loan impairment is measured based on
the present value of expected future cash flows or the fair value of collateral
if the loan is collateral dependent. If the fair value of an impaired loan is
less than its recorded investment, a specific valuation allowance is allocated
to the loan. Interest income on impaired loans other than non-accrual loans, is
recorded on an accrual basis.
22
The following table sets forth the recorded investment in impaired
loans and the related valuation allowance for each loan category as of December
31, 2001 and 2000:
Amount in the Amount in the
Recorded Recorded
Investment in Investment in
Impaired Loans Impaired Loans Total
for Which There for Which There Recorded
is a Related is No Related Investment in Amount of
Allowance for Allowance for the Impaired Allowance for
Loan Losses Loan Losses Loans Loan Losses
- -----------------------------------------------------------------------------------------
At December 31, 2001
- -----------------------------------------------------------------------------------------
Commercial business $10,661 $-- $10,661 $2,039
Commercial real estate 4,513 -- 4,513 678
Construction -- -- -- --
- -----------------------------------------------------------------------------------------
Total $15,174 $-- $15,174 $2,717
- -----------------------------------------------------------------------------------------
At December 31, 2000
- -----------------------------------------------------------------------------------------
Commercial business $ 3,970 $-- $ 3,970 $ 512
Commercial real estate 2,414 -- 2,414 237
Construction -- -- -- --
- -----------------------------------------------------------------------------------------
Total $ 6,384 $-- $ 6,384 $ 749
- -----------------------------------------------------------------------------------------
Primarily all of the impaired loans were measured based on the fair
value of collateral. The average recorded investment in impaired loans for the
years ended December 31, 2001, 2000 and 1999 were $12.3 million, $3.8 million
and $1.8 million, respectively. Interest income recognized on impaired loans
totaled $538,000 for 2001, $176,000 for 2000 and $56,000 for 1999.
The amount of impaired loans is not directly comparable with the amount
of underperforming loans previously disclosed. The primary differences between
underperforming loans and impaired loans are: i) all loan categories are
considered in determining underperforming loans while impaired loan recognition
is limited to commercial business loans, commercial real estate loans and
construction loans; and ii) impaired loan recognition considers not only loans
90 days or more past due and non-accrual loans but also may include possible
problem loans other than delinquent loans. At December 31, 2001, the balance of
impaired loans included non-accrual loans of $7.1 million and loans 90 days or
more past due of $983,000. At December 31, 2000, the balance of impaired loans
included non-accrual loans of $1.5 million and loans 90 days or more past due of
$1.8 million.
The following table sets forth information concerning the principal
balances and percent of the total loan and lease portfolio represented by
delinque