FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
(X) Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
OR
( ) Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended:
September 30, 1996 Commission File Number: 0-17286
PRIME BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2528428
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6425 Rising Sun Avenue, Philadelphia, Pennsylvania 19111
(Address of principal executive offices) (Zip Code)
(215) 742-5300
(Registrant's telephone number, including area code)
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 and Exchange Act of 1934 during the preceding 12 months
(or for 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
The number of shares outstanding of the Registrant's common
stock as of September 30, 1996:
Common Stock -- 3,725,066
PRIME BANCORP, INC.
INDEX
Part I Financial Information
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial 1
Condition:
December 31, 1995 and September 30, 1996
(Unaudited)
Consolidated Statements of Operations, 2
Three Months Ended:
September 30, 1995 and 1996
(Unaudited)
Consolidated Statements of Operations, 3
Nine Months Ended:
September 30, 1995 and 1996
(Unaudited)
Consolidated Statements of Cash Flows, 4 - 5
Nine Months Ended:
September 30, 1995 and 1996
(Unaudited)
Notes to Consolidated Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of 9 - 17
Financial Condition and Results of Operations
Part II Other Information 18
Signatures 19
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
December 31, September 30,
1995 1996
------------ -------------
(Unaudited)
Assets
Cash and due from banks...................... $ 13,092 $ 21,260
Interest-bearing deposits.................... 34,937 1,952
--------- ---------
Cash and cash equivalents................. 48,029 23,212
--------- ---------
Investment securities (fair value of
($13,849 and $10,810)..................... 13,708 10,892
Investment securities available for sale..... 23,863 45,417
Mortgage-backed securities (fair value of
($82,045 and $99,622)..................... 81,084 100,123
Mortgage-backed securities available for sale 54,739 54,595
Loans receivable............................. 348,886 406,896
Deferred fees.............................. (392) (56)
Allowance for loan losses.................. (3,764) (4,148)
--------- ---------
Loans receivable, net................... 344,730 402,692
--------- ---------
Loans held for sale ......................... 6,814 6,609
Accrued interest receivable.................. 4,339 5,054
Real estate owned............................ 370 445
Land acquired for development and resale..... 10,405 9,483
Property and equipment....................... 9,229 9,138
Other assets................................. 10,665 9,646
--------- ---------
Total assets........................... $ 607,975 $ 677,306
--------- ---------
--------- ---------
Liabilities and Stockholders' Equity
Liabilities:
Deposits.................................. $ 476,539 $ 499,507
Advances from Federal Home Loan Bank of
Pittsburgh.............................. 14,000 12,000
Other borrowed money...................... 54,844 99,291
Advance payments by borrowers for taxes
and insurance........................... 2,211 1,119
Other liabilities......................... 4,134 7,874
--------- ---------
Total liabilities...................... 551,728 619,791
--------- ---------
Stockholders' equity
Serial preferred, $1 par value; 5,000,000
shares authorized and unissued.......... -- --
Common stock, $1 par value; 10,000,000
shares authorized; 3,889,707 and
3,909,129 shares issued in 1995 and 1996 3,890 3,909
Additional paid-in capital................ 30,455 30,637
Retained earnings substantially restricted 24,275 25,521
Valuation adjustment for debt securities
net of taxes............................ (1,558) (1,737)
Treasury stock (184,063 shares at cost)... (815) (815)
--------- ---------
Total stockholders' equity................ 56,247 57,515
--------- ---------
Total liabilities and stockholders' equity $ 607,975 $ 677,306
--------- ---------
--------- ---------
See accompanying notes to consolidated financial statements.
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
Three Months Ended September 30,
1995 1996
(Unaudited)
Interest income:
Loans receivable, net................... $ 7,728 $ 8,739
Mortgage-backed securities.............. 2,028 2,516
Investment securities................... 948 829
Interest-bearing deposits............... 58 43
Total interest income.............. 10,762 12,127
Interest expense:
Deposits................................ 4,831 4,720
Short-term borrowings................... 678 1,259
Long-term borrowings.................... 27 27
Total interest expense............. 5,536 6,006
Net interest income................ 5,226 6,121
Provision for loan losses.................... 159 455
Net interest income after provision
for loan losses...................... 5,067 5,666
Non-interest income:
Fees and service charges................ 354 326
Gain (loss) on sale of:
Loans held for sale................... 120 29
Investment securities available for
sale................................ 29 59
Mortgage-backed securities available
for sale............................ 20 --
Real estate owned..................... 13 14
Rental income......................... 51 49
Other................................... 190 180
Total non-interest income.......... 777 657
Non-interest expenses:
Salaries and employee benefits.......... 1,726 1,928
Occupancy and equipment................. 652 875
Federal insurance premiums.............. 243 256
FDIC special assessment................. -- 2,713
Other................................... 825 843
Total non-interest expenses........ 3,446 6,615
Income before income taxes.............. 2,398 (292)
Income taxes............................ 907 (189)
Net Income......................... $ 1,491 $ (103)
Earnings per share:
Primary and fully diluted.................... $ .40 $ (.03)
Weighted average number of shares
outstanding................................. 3,755,673 3,788,389
Dividends declared per share................. .15 .17
See accompanying notes to consolidated financial statements.
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
Nine Months Ended September 30,
1995 1996
(Unaudited)
Interest income:
Loans receivable, net................... $ 22,673 $ 24,780
Mortgage-backed securities.............. 6,187 7,198
Investment securities................... 2,606 2,387
Interest-bearing deposits............... 340 225
Total interest income.............. 31,806 34,590
Interest expense:
Deposits................................ 13,585 14,072
Short-term borrowings................... 2,457 2,921
Long-term borrowings.................... 93 81
Total interest expense............. 16,135 17,074
Net interest income................ 15,671 17,516
Provision for loan losses.................... 515 1,105
Net interest income after provision
for loan losses...................... 15,156 16,411
Non-interest income:
Fees and service charges................ 870 1,125
Gain (loss) on sale of:
Loans held for sale................... 53 78
Investment securities available for
sale................................ (316) 208
Mortgage-backed securities available
for sale............................ 416 --
Real estate owned .................... (60) 14
Land acquired for development and sale 49 --
Mortgage servicing rights............. 260 --
Rental income......................... 105 192
Other................................... 591 511
Total non-interest income............... 1,968 2,128
Non-interest expenses:
Salaries and employee benefits.......... 4,937 5,562
Occupancy and equipment................. 1,891 2,532
Federal insurance premiums.............. 757 758
FDIC special assessment................. -- 2,713
Other................................... 2,470 2,285
Total non-interest expenses........ 10,055 13,850
Income before income taxes.............. 7,069 4,689
Income taxes............................ 2,616 1,544
Net Income......................... $ 4,453 $ 3,145
Earnings per share:
Primary and fully diluted.................... $ 1.18 $ .83
Weighted average number of shares
outstanding................................. 3,761,920 3,784,186
Dividends declared per share................. .45 .51
See accompanying notes to consolidated financial statements.
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months Ended September 30,
1995 1996
(Unaudited)
Cash flows from operating activities:
Net Income................................. $ 4,453 $ 3,145
Adjustments to reconcile net income
to net cash from operating
activities:
Depreciation......................... 1,145 1,565
(Gain) loss on sale of:
Loans held for sale................ (53) (78)
Investment securities available for
sale............................. 316 (208)
Mortgage-backed securities
available for sale............... (416) --
Land acquired for development & resale (49) --
Real estate owned ................. 60 (14)
Provision for loan losses............ 515 1,105
Increase in accrued interest
receivable ........................ (880) (715)
Decrease in other assets............. 1,841 304
Increase (decrease) in
other liabilities.................. (5,383) 3,737
Net cash provided from operating
activities.................... 1,549 8,841
Cash flows from investing activities:
Investment securities available for sale:
Purchases................................ (11,717) (28,139)
Maturities............................... 1,284 5,433
Sales.................................... 28,809 839
Mortgage-backed securities available for sale:
Purchases................................ (34,722) (5,098)
Repayments............................... 8,369 5,811
Sales.................................... 31,642 --
Investment securities:
Purchases................................ (15,973) (9,067)
Maturities............................... 1,142 12,083
Mortgage-backed securities:
Purchases................................ (10,395) (27,202)
Repayments............................... 653 8,163
Loans receivable:
Originations, net of repayments.......... (29,018) (59,349)
Loans held for sale:
Originations, net of repayments.......... (4,832) (5,527)
Sales.................................... 7,523 5,810
Proceeds from sale of land acquired for
development and resale................... 520 2,140
Increase in land acquired for development
and resale............................... (53) (1,218)
See accompanying notes to consolidated financial statements.
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
Nine Months Ended September 30,
1995 1996
(Unaudited)
Cash flows from investing activities (continued):
Purchase of property and equipment......... (1,136) (1,186)
(Increase) decrease real estate owned ..... (224) 2
Proceeds from sale of real estate owned.... 650 219
Net cash and cash equivalents received
from banking institutions acquired....... -- --
Net cash used in investing activities...... (27,478) (96,286)
Cash flows from financing activities:
Net increase in deposits................... 25,677 22,968
Advances from the Federal Home Loan Bank
of Pittsburgh........................... 69,150 35,200
Repayments of advances from the Federal
Home Loan Bank of Pittsburgh ............ (61,150) (37,200)
(Increase) decrease in other borrowed money (13,269) 44,447
Decrease in advance payments by borrowers
taxes and insurance...................... (757) (1,092)
Net proceeds from issuance of common stock. -- 201
Cash dividends paid........................ (1,734) (1,896)
Net cash provided from financing
activities............................ 17,917 62,628
Net change in cash and cash equivalents (8,012) (24,817)
Cash and cash equivalents:
Beginning of period...................... 26,852 48,029
End of period............................ 18,840 23,212
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest.............................. $ 15,881 $ 17,061
Income taxes.......................... 2,381 1,207
Non-cash investing activity consist of:
Transfer of loans to real estate owned $ 849 $ 282
Transfer of loans to land acquired for
development and resale............. $ 9,392 $ --
Valuation Adjustment (net of taxes) for:
Investment securities available
for sale .......................... $ 78 $ 215
Mortgage-backed securities available
for sale .......................... $ 701 $ 719
See accompanying notes to consolidated financial statements.
PRIME BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting policies of
Prime Bancorp, Inc. and subsidiaries (the "Company"). The accompanying
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles, which have been applied on a
consistent basis except for the change in accounting principle as described
below.
Business
The Company's principal business is conducted through Prime Bank (the
"Bank"). The Bank's principal business consists of attracting deposits and
obtaining borrowings, then investing those deposits and borrowings in various
types of loans, mortgage-backed securities, and other investments. These
operations are conducted through a branch network in Southeastern
Pennsylvania. While the Bank is subject to competition from other financial
institutions, it is also subject to the regulations of certain federal
agencies and, therefore, undergoes periodic examinations by those regulatory
authorities.
Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned and majority-owned subsidiaries. The
Company's principal subsidiary is the Bank. All significant intercompany
balances and transactions have been eliminated in consolidation. Certain
reclassifications have been made to prior year amounts to conform with the
current year's presentation; such reclassifications have no impact on income.
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods. Results of operations for the
nine month period ended September 30, 1996 are not necessarily indicative of
the results to be expected for the full year.
Earnings Per Share
Earnings per share was calculated based on the weighted average number
of shares of common stock outstanding for the respective periods. Stock
options are considered common stock equivalents and are included in the
computation of the number of outstanding shares using the treasury stock
method.
PRIME BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loan Impairment
On January 1, 1995, the Company adopted the provisions of Statement on
Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for
Impairment of a Loan and SFAS No. 118, Accounting for Creditors of Impairment
of a Loan - Income Recognition and Disclosures. SFAS No. 114 and 118 require
that "impaired" loans be measured based on present value of expected future
cash flows, discounted at the loan's effective interest rate or, as a
practical expedient, at the loans observable market price or the fair value
of the collateral if the loan is collateral dependent.
As of September 30, 1996, the Company has impaired loans which consist
of non-accrual loans with a specific reserve of $210 thousand.
Acquisition
Pursuant to an Agreement and Plan of Reorganization dated June 12, 1996,
as amended September 12, 1996 ("Agreement"), the Company agreed to acquire
First Sterling Bancorp, Inc. ("FSB") in a transaction structured as a merger.
Also on September 12, 1996, the Company entered into an Agreement and Plan of
Merger with Prime Newco, Inc. ("Newco"). Under the terms of the agreements,
Prime and FSB will merge with and into Newco, which will assume the name
"Prime Bancorp, Inc." after the transactions. Both mergers are intended to
be completed simultaneously.
Pursuant to the terms of the Agreement and upon the effective date of
the mergers, each outstanding share of common stock of FSB and each
outstanding share of common stock of the Company (as reflected on its
official stock transfer records), will be exchanged for one share of common
stock of Newco. This will result in the issuance of approximately 1.66
million shares of Newco common stock to the shareholders of FSB and
approximately 3.725 million shares of Newco common stock to the shareholders
of the Company. The transaction is based on a fixed exchange ratio, and is
expected to be accounted for as a pooling of interests. The transaction is
also expected to be tax-free to the shareholders for federal income tax
purposes.
Prime is the savings and loan holding company for Prime Bank ("the
Bank"), a Pennsylvania chartered stock savings bank. The Bank with
approximately $677 million in assets, has 18 branches located in
Philadelphia, Bucks and Montgomery counties. Headquartered in Devon,
Pennsylvania, FSB is the holding company of First Sterling Bank ("First
Sterling"), a Pennsylvania state chartered commercial bank with approximately
$232 million in assets. First Sterling currently operates 5 branches located
in Montgomery and Chester counties.
A Registration Statement on Form S-4 was filed by Newco with the
Securities and Exchange Commission and was declared effective on November 4,
1996. The Prospectus/Joint Proxy Statement has been mailed to shareholders
of both Prime and FSB and special meetings of the stockholders of both
companies are schedule to be held on December 17, 1996.
PRIME BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquisition - Continued
The transaction is subject to customary regulatory approvals and the
Company is expecting to receive the Federal Reserve Bank Board approval by
November 15, 1996 and the approval from the PA Department of Banking by
November 30, 1996. It is anticipated that the transaction will close on
December 31, 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Assets of the company increased 11.40% or $69.3 million from $608.0
million at December 31, 1995 to $677.3 million at September 30, 1996. This
increase is primarily attributable to loan growth of approximately $58.0
million and investment growth of $37.6 million which is partially offset by
a decrease in cash and cash equivalents of $24.8 million and net changes in
non-earning assets. Because of the Bank's efforts to diversify lending away
from traditional thrift residential lending, investments are
disproportionally weighted into mortgage-backed securities, so that the Bank
can continue to pass the Qualified Thrift Lending test. Interest rate risk
is reduced through investments in medium term Collateral Mortgage Obligations
("CMOs") and Adjustable Rate Mortgages. A large percentage of the CMO
investments are U.S. Agency or backed by U.S. Agency collateral and have
average lives less than 4.5 years. The market value of mortgage-backed
securities are inversely related to interest rates, market values generally
rise as interest rates fall, and fall as interest rates rise. Prepayment
speeds, which are partly a function of interest rates, also influence
mortgage-backed security performance.
The Company's liabilities increased by 12.34% or $68.1 million, from
$551.7 million at December 31, 1995 to $619.8 million at September 30, 1996.
This increase was primarily due to an increase of $44.5 million in borrowed
money, which consists primarily of reverse repurchase agreements and a $23
million increase in deposits due primarily to the introduction of new deposit
products. Advances from the Federal Home Bank of Pittsburgh decreased $2.0
million. Funds obtained from deposit and reverse repurchase agreements were
used to pay off a $2.0 million FHLB Advance and to fund loan originations and
security purchases.
Liquidity and Capital Resources
Liquidity for a financial institution is a measure of the financial
institution's ability to fund customers' needs for borrowings and deposit
withdrawals. The Company's policy has always been to maintain a strong
liquidity position, in addition to cash and short-term investments. The
Company's principal sources of funds are savings deposits, principal
repayments on loans, proceeds from the sale of loans, funds from operations,
advances from the FHLB of Pittsburgh and other borrowed money.
Cash flows used in investing activities were $96.3 million for the nine
months ended September 30, 1996 compared to $27.3 million for the same period
in 1995. This increase was primarily attributable to an increase in loan
originations of $59.3 million for the nine months ended September 30, 1996
when compared to $29.0 million for the same period in 1995. Net investment
and mortgage-backed securities activity increase by $37.2 million for the
nine months ended September 30, 1996 compared to $9.1 million for the same
period in 1995.
Cash flows provided from financing activities were $62.6 million for the
nine months ended September 30, 1996 compared to $17.9 million for the same
period in 1995. This change is primarily attributable to a increase of $44.4
million in other borrowed money in 1996 compared to a decrease of $13.3
million for the same period in 1995.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources - Continued
Cash flows from operating activities provided $8.9 million and $1.4
million for the nine months ended September 30, 1996 and 1995, respectively.
This increase is primarily due to an increase in other liabilities of $3.7
million for the nine months ended September 30, 1996 in comparison to a
decrease of $5.4 million for the same period in 1995, which is partially
offset by decreases in net income and other assets.
The Bank is required under federal regulations to maintain specific
levels of "liquidity" investments in qualifying types of U.S. Treasury and
federal agency obligations and other types of investments having maturities
of five years or less. The required level of these liquid investments, which
is currently 5% of the Bank's net withdrawable deposits plus short-term
liabilities, of which not less than 1% must consist of short term liquid
assets as defined by the OTS, is changed from time to time by the OTS as a
result of changes in economic conditions. Such investments are intended to
provide a source of liquid funds upon which the Bank may rely, if necessary,
to fund deposit withdrawals and for other short-term funding needs. At
September 30, 1995 and 1996, the Bank's liquidity ratio was 8.4% and 8.9%,
respectively. The short-term liquidity ratios exceeded the regulatory
requirement of 1% for both periods.
Capital
The following table sets forth, at September 30, 1996, the OTS
requirements and the actual amount of regulatory capital that the Bank had
under each requirement (dollars in thousands):
Tangible Capital $ 9,612 $45,114 7.04%
Risk-Based Capital 32,363 49,262 12.18%
PA Leverage Ratio 25,631 45,114 7.04%
The Bank meets the fully phased in risk-based capital requirements.
Net Income
The Company reported consolidated net income of $3.1 million and a
negative $103 thousand for the nine months and three months ended September
30, 1996. This represents an decrease of $1.4 million and $1.6 million when
compared to the consolidated net income of $4.5 million and $1.5 million for
the same periods in 1995. The nine month and three month decrease was
primarily attributable to a one time charge associated with the BIF/SAIF
recapitalization plan of $2.7 million pre-tax or $1.66 million after tax.
Net income for the nine months and three months would have been $4.8 million
and $1.6 million, respectively if the BIF/SAIF charge was excluded. This
represents an increase of 7.9% and 4.7% when compared to the nine months and
three months ended September 30, 1995. The increase for the nine months is
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net Income - Continued
primarily attributable to an increase of net interest income after provision
for loan losses of 8.3% or $1.3 million. The three month increase was
primarily attributable to an increase of net interest income after provision
for loan losses of 11.8% or $599 thousand which is partially offset by a
decrease of $120 thousand in non-interest income and an increase of $456
thousand in non-interest expenses excluding the one time BIF/SAIF
recapitalization charge.
On a fully diluted per share basis net income decreased to $0.83 and
$(0.03) for the nine months and three months ended September 30, 1996
compared to $1.18 and $0.40 for the same period in 1995. Fully diluted
earnings per share would have been $1.29 and $0.42 if the one time BIF/SAIF
charge was excluded. The Company's return on average assets was 0.65% and
(0.06)% for nine months and three months ended September 30, 1996 compared to
1.03% and 1.03% for the same period in 1995. Return on average assets before
the one time BIF/SAIF charge was 1.00% and 0.94% for the nine months and
three months ended September 30, 1996. The Company's return on average equity
for the nine months and three months ended September 30, 1996 were 7.37% and
(0.71)% compared with 10.88% and 11.53% for the same periods in 1995. Return
on average equity before the one time BIF/SAIF charge was 11.11% and 10.65%
for the nine months and three months ended September 30, 1996.
Net Interest Income
The major component of the Bank's earnings is net interest income. Net
interest income is the difference between interest income earned on loans and
other interest-earning assets and interest expense paid on deposits and
borrowings. Net interest income was $17.5 million and $6.1 million for the
nine months and three months ended September 30, 1996. This represents a
11.8% and 17.1% increase when compared to consolidated net interest income of
$15.7 million and $5.2 million for the same periods in 1995. Net interest
income increased by $145 thousand for the quarter ended
September 30, 1996 compared to $6.0 million for the three months ended June
30, 1996.
The net interest margin decreased from 4.32% to 4.21% for the nine
months ended September 30, 1995 and 1996. The decrease is primarily the
result of a change in the mix of earning assets caused by leverage in the
investment portfolio at somewhat lower spreads.
The yield on average interest-earning assets decreased 33 and 36 basis
points for the nine months and the three months ended September 30, 1996
compared to the respective periods in 1995. This decrease is primarily
attributable to decreases of 36 and 61 basis points on loans receivable for
the nine months and three months ended September 30, 1996 and the comparable
period in 1995.
The cost of average interest-bearing liabilities decreased 20 and 31
basis points for the nine months and three months ended September 30, 1996
compared to the respective period in 1995. This decrease is attributable to
a general decrease in rates being offered on deposit products.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net Interest Income - Continued
The table below illustrates the changes in the net interest rate margin
and interest rate spread for the nine months and three months ended September
30, 1995 and 1996.
Nine Months Three Months
September 30, September 30,
1995 1996 1995 1996
Interest-earning assets:
Loans receivable.................9.38% 9.02% 9.40% 8.79%
Mortgage-backed securities.......6.55% 6.45% 6.23% 6.56%
Investment securities............7.23% 6.97% 7.49% 6.99%
Deposit and other investments....7.75% 4.15% 10.35% 5.61%
Total interest-bearing assets......8.45% 8.12% 8.41% 8.05%
Interest-bearing liabilities:
Deposits.........................3.96% 3.82% 4.09% 3.63%
Borrowings.......................6.43% 5.27% 5.71% 5.43%
Total interest-bearing liabilities.4.21% 4.01% 4.25% 3.94%
Net interest rate spread...........4.24% 4.11% 4.16% 4.11%
Net interest rate margin...........4.32% 4.21% 4.25% 4.19%
Net interest income has also been affected by disparate growth in
interest-earning assets and an increase in interest-bearing liabilities.
Total average interest-earning assets increased $60.5 million for the nine
months ended September 30, 1996 to $582.0 million from $521.5 million at
September 30, 1995. Total average interest-bearing liabilities increased
$56.8 million for the nine months ended September 30, 1996 to $567.3 million
from $510.5 million at September 30, 1995.
Provisions for Loan Losses
The provision for loan losses was $1.1 million and $455 thousand for the
nine months and the three months ended September 30, 1996 compared to $515
thousand and $159 thousand for the same periods in 1995. The allowance for
loan losses was $3.8 million and $4.1 million at December 31, 1995 and
September 30, 1996, respectively. The Bank had net charge-offs of $721
thousand and $43 thousand for the nine months and three months ended
September 30, 1996, compared to $1.1 million and $99 thousand for the
respective periods in 1995.
Management considers a variety of factors when establishing the
allowance, recognizing that an inherent risk of loss always exists in the
lending process. Consideration is given to the impact of current economic
conditions, diversification of the loan portfolio, historical loss
experience, delinquency statistics, results of detailed loan and regulatory
reviews, borrowers' financial and managerial strengths, the adequacy of
underlying collateral, and other relevant factors.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following is a summary of the activity in the allowance for loan
losses for the nine months ended September 30, 1995 and 1996 (Dollars in
thousands):
1995 1996
Balance at the beginning of period $ 4,285 $ 3,764
Provision for loan losses 515 1,105
Recoveries 24 108
Losses charged against allowance (1,147) (829)
Balance at the end of period $ 3,677 $ 4,148
Non-Interest Income
Non-interest income increased 8.1% and decreased 15.4% for the nine
months and three months ended September 30, 1996 to $2.1 million and $657
thousand in 1996 from $2.0 million and $777 thousand for the comparable
periods in 1995. The increase for the nine month period was primarily
attributable to a $255 thousand increase in fees and service charges, a net
increase of $108 thousand realized on the sale of investment securities and
mortgage-backed securities, offset by a decrease in the gain on the sale of
mortgage servicing rights of $260 thousand. The decrease for the three month
period is primarily attributable to a decrease in other income of $118
thousand.
Non-Interest Expense
The primary component of non-interest expenses is salaries and employee
benefits, which increased 12.7% and 11.7% for the nine months and three
months ended September 30, 1996 from $5.6 million and $1.9 million in 1996 to
$4.9 million and $1.7 million in 1995. The number of full time equivalent
employees increased from 204 at September 30, 1995 to 232 at September 30,
1996 due to the additional branch offices at Willow Grove, Chestnut Hill,
Center City and Huntingdon Valley.
Occupancy and equipment expense increased 33.9% to $2.5 million and
34.2% to $875 thousand for the nine months and three months ended September
30, 1996 from $1.9 million and $652 thousand for the same periods in 1995.
The increase is primarily attributable to an increase in maintenance expense
as well as the additional rent expense incurred from the opening of two
branch offices and the acquisition of two branches since September 30, 1995.
FDIC special assessment increased for the nine months and three months
ended September 30, 1996 by $2.7 million. This assessment is a one time
charge to recapitalize the SAIF Fund. Other federal insurance premiums
remained relatively unchanged for the nine months and three months ended
September 30, 1996 as compared to the same period in 1995.
Other expenses decreased $185 thousand and increased $18 thousand for
the nine months and three months ended September 30, 1996 compared to the
same period in 1995. The decrease for the nine months is primarily
attributable a decrease in data processing costs associated with the
acquisition of two branches from the Resolution Trust Corporation in 1995.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Credit Risk
The Bank manages credit risk by maintaining diversification in its loan
portfolio, by establishing and enforcing rigorous underwriting standards, by
requiring board committee approvals of loan applications in excess of
$1,000,000, by intensive collection efforts, and by establishing and
performing regular loan classification reviews of loans by the loan review
committee.
Asset Quality
Non-performing assets, which include non-accruing loans and real estate
owned, totaled $3.4 million at December 31, 1995 compared to $8.1 million at
September 30, 1996. This increase is primarily attributable to the
classification of $4.2 million of construction loans and $1.3 million of
commercial loans to non-accrual status. The non-accrual construction loans
consists of $2.8 million to one borrower.
The following table sets forth non-performing assets as of December 31,
1995 and September 30, 1996 (Dollars in thousands):
December 31, September 30,
1995 1996
Non-accrual loans:
Residential loans $ 1,786 $ 958
Construction -- 4,181
Consumer loans 269 309
Commercial loans 925 2,212
Total non-accrual loans 2,980 7,660
Real estate owned 370 445
Total non-performing assets $ 3,350 $ 8,105
Total non-performing assets to
loans receivable, net 0.97% 2.01%
Total non-performing assets to
total assets 0.55% 1.20%
Ratio of allowance for loan
losses to non-performing loans 112.36% 54.15%
(1) Statistics do not include the impact of the $10.0 million
condominium project, which was acquired by a deed in lieu of foreclosure
and classified as land acquired for development and resale. Non-
performing assets, the ratio of non-performing assets to loans
receivable, net and the ratio of non-performing assets to total assets
would have been $13.4 million, 3.9% and 2.2% at December 31, 1995 and
$18.1 million, 4.5% and 2.8% at September 30, 1996 if the condominium
project was included in non-performing assets. Interest income not
recorded on the project during the three months ended December 31, 1995
and September 30, 1996 was approximately $240 thousand and $238
thousand, respectively.
Interest income not recognized for non-accrual loans during the three
months ended December 31, 1995 and September 30, 1996 was $7 thousand and $38
thousand, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Dividend Policy
The Board of Directors of the Company declared a cash dividend of $0.17
per share of common stock on September 18, 1996, payable November 1, 1996, to
shareholders of record on October 5, 1996. It is currently the Board's
intention to continue to pay dividends on a quarterly basis. This is the
Company's thirty first consecutive quarterly cash dividend.
Future payment of dividends, however, will be subject to determination
and declaration by the Board of Directors, which will take into account the
Company's financial condition, results of operations, industry standards,
economic conditions and other factors including regulatory restrictions.
Currently, the Company must rely on the Bank's payment of a dividend to the
Company in order to generate the cash and income to pay the dividend. The
Board may also consider the payment of stock dividends from time to time in
addition to, or in lieu of, cash dividends.
The Bank may not declare or pay a cash dividend on any of its stock if
the effect thereof would cause the Bank's net worth to be reduced below (1)
the amount required for the liquidation account, or (2) the net worth
requirement imposed by the OTS.
Regulatory Developments
On August 20, 1996, federal legislation was passed which will require
thrift institutions such as Prime Bank to recapture federal income tax
benefits associated with post-1987 excess bad debt reserve deductions,
whether or not such thrift institutions merge with or convert into commercial
banks. However, federal tax benefits associated with pre-1988 excess bad
debt reserve deductions are now protected from recapture, including in cases
of merger with or conversion into a commercial bank. As a result of this
legislation, the primary obstacle to the conversion of many thrift
institutions into commercial banks has been eliminated.
On September 30, 1996, President Clinton signed the Economic Growth and
Regulatory Paperwork Reduction Act of 1996, a BIF/SAIF rescue package which
included the following provisions: (1) with certain exceptions, SAIF member
institutions such as Prime Bank will be obligated to pay, by November 27,
1996, a one time special assessment based on their deposits as of March 31,
1995 (FDIC staff has estimated that this assessment will be at a rate of 65.7
basis points, but it may be higher if the FDIC grants more exemptions from
payment of the assessment than it has initially projected), and, as a result
of this recapitalization of the SAIF fund it is expected that the
differential between the basic deposit insurance assessment rate between BIF
and SAIF will be reduced substantially, if not eliminated; (2) with certain
exceptions, beginning on January 1, 1997, all federally insured banking and
savings institutions would begin sharing the costs of payments to the
Financing Corporation("FICO") for debt service on FICO obligations, but at
different rates, with BIF-Insured deposits assessed at a rate estimated to be
approximately 1.3 basis points, in contrast to SAIF-insured deposits which
would be assessed at a rate of approximately 6.4 basis points, resulting in
a deposit insurance disparity as between BIF and SAIF insured deposits of
slightly over 5 basis points until the date that the BIF and SAIF funds
merge; (3) the BIF and SAIF funds would merge to form a new "Deposit
Insurance Fund" on January 1, 1999 (provided there are "no savings
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Regulatory Developments - Continued
associations" - as distinguished from state savings banks such as Prime Bank
and other institutions classified as "banks" for deposit insurance purposes-
on that date); (4) the Treasury Department would be directed to report to
Congress by March 31, 1997 on issues relating to the possible merger of the
OTS and the OCC and a combination of federal thrift charters and national
bank charters into single federal banking charter; (5) the federal banking
regulators would be authorized to prohibit SAIF insured institutions from
inducing customers to shift their deposits to affiliated BIF insured
institutions; and (6) a number of regulatory relief provisions were included.
On October 8, 1996, the FDIC proposed to reduce the fourth quarter SAIF
assessment rate to adjust for the recapitalization of the SAIF fund. Under
the proposal, the 23 basis point assessment for well-capitalized institutions
would be reduced to 18 basis points for those "savings associations" which
are obligated to pay FICO, and to the nominal minimum statutory assessment
for institutions which are not obligated to pay FICO assessments.
PART II
OTHER INFORMATION
Item 1 Legal Proceedings
The Company is not engaged in any legal proceedings of a material nature
at the present time. From time to time, the Company is a party to legal
proceedings wherein it enforces its security interest in mortgage loans made
by it.
Item 2 Changes in Securities
Not applicable.
Item 3 Defaults Upon Senior Securities
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5 Other Information
Not applicable.
Item 6 Exhibits and Reports on Form 8-K
Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 1996 /s/ James J. Lynch
James J. Lynch
President and Chief
Executive Officer
Date: November 14, 1996 /s/ Michael J. Sexton
Michael J. Sexton
Treasurer and Chief
Financial Officer