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:
March 31, 1999 Commission File Number: 0-17286
PRIME BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2860688
- ------------------------------- -------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7111 Valley Green Road, Fort Washington, Pennsylvania 19034
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(Address of principal executive offices) (Zip Code)
(215) 836-2400
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(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 April 5, 1999:
Common Stock -- 11,001,806
PRIME BANCORP, INC.
INDEX
Part I Financial Information
Item 1. Consolidated Financial Statements
Financial Highlights 1
Consolidated Statements of Financial 2
Condition:
March 31, 1999 (Unaudited) and
December 31, 1998
Consolidated Statements of Income, 3
Three Months Ended:
March 31, 1999 and 1998
(Unaudited)
Consolidated Statements of Shareholders' 4
Equity and Comprehensive Income,
Three Months Ended:
March 31, 1999 and 1998
(Unaudited)
Consolidated Statements of Cash Flows 5
Three Months Ended:
March 31, 1999 and 1998
(Unaudited)
Notes to Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of 8 - 15
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16
Part II Other Information 17
Signature 18
PRIME BANCORP, INC.
FINANCIAL HIGHLIGHTS *
(Dollars in thousands except per share data)
(Unaudited)
Quarter Ended
March 31,
----------------
Income Statement 1999 1998 $ Change % Change
- ----------------------------------------------------------------
Net Interest Income $10,185 $9,797 $ 388 4.0%
Provision for Loan
Losses 501 570 (69) -12.1%
Non-Interest Income 1,235 1,175 60 5.1%
Non-Interest Expense 6,260 6,384 (124) -1.9%
- ----------------------------------------------------------------
Income Before Taxes 4,659 4,018 641 16.0%
Income Taxes 1,623 1,354 (269) -19.9%
- ----------------------------------------------------------------
Net Income $3,036 $2,664 $ 372 14.0%
- ----------------------------------------------------------------
- ----------------------------------------------------------------
Diluted earnings per share $0.27 $0.24 $0.03 12.5%
- ----------------------------------------------------------------
- ----------------------------------------------------------------
Dividends per share $0.110 $0.095 $0.015 15.8%
- ----------------------------------------------------------------
- ----------------------------------------------------------------
* The financial statements have been adjusted to reflect a 2 for 1 stock split
paid to shareholders on June 19, 1998.
Quarter Ended
March 31,
---------------
PERFORMANCE RATIOS 1999 1998 Change % Change
- ----------------------------------------------------------------
Return on Average Assets 1.20% 1.12% 0.08% 7.1%
Return on Average Equity 13.57% 13.40% 0.17% 1.3%
Net Interest Margin 4.29% 4.41% -0.12% -2.7%
Efficiency Ratio 54.83% 58.22% -3.39% -5.8%
- ----------------------------------------------------------------
STATEMENT OF FINANCIAL CONDITION
Average Balances
Actual Balances Quarter Ended
March 31, March 31,
-----------------------------------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------
Total Assets $1,040,863 $1,026,672 $1,026,028 $ 963,080
Loans Receivable, net 664,311 630,511 656,999 633,335
Investment Securities
Available for Sale 225,469 176,343 253,143 150,928
Investment Securities
Held to Maturity 45,024 111,325 50,282 114,089
Deposits 713,738 717,486 708,300 695,197
Total Borrowings 230,967 220,131 220,753 180,722
Shareholders' Equity 90,617 81,981 90,706 80,645
- -------------------------------------------------------------------------
March 31,
-----------------
ASSET QUALITY 1999 1998
- -----------------------------------------------------
Non-Performing Assets to
Total Assets 0.32% 0.32%
Allowance for Loan Losses to
Total Loans 1.47% 1.39%
Allowance for Loan Losses to
Non-Performing loans 383.53% 325.23%
Allowance for Loan Losses to
Non-Performing Assets 293.46% 269.08%
- -----------------------------------------------------
1
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
March 31, December 31,
1999 1998
- ------------------------------------------------------------------------------
(Unaudited)
Assets
Cash and due from banks...................... $ 31,629 $ 31,027
Interest-bearing deposits.................... 38,546 10,306
---------- ----------
Cash and cash equivalents................. 70,175 41,333
---------- ----------
Investment securities held to maturity (fair
value of $45,582 and $57,171)............. 45,024 56,436
Investment securities available for sale
at fair value............................. 225,469 250,935
Loans receivable............................. 674,233 666,483
Allowance for loan losses.................. (9,922) (9,569)
---------- ----------
Loans receivable, net................... 664,311 656,914
---------- ----------
Loans held for sale ......................... 3,252 2,081
Accrued interest receivable.................. 7,448 7,659
Real estate owned............................ 794 702
Land acquired for development and resale..... 1,282 1,705
Property and equipment....................... 9,663 9,652
Other assets................................. 13,445 11,923
---------- ----------
Total assets........................... $1,040,863 $1,039,340
---------- ----------
---------- ----------
Liabilities and Shareholders' Equity
Liabilities:
Deposits.................................. $ 713,738 $ 702,893
Repurchase agreements..................... 106,967 103,852
Borrowings from Federal Home Loan Bank of
Pittsburgh.............................. 124,000 134,503
Other liabilities......................... 5,541 8,289
---------- ----------
Total liabilities...................... 950,246 949,537
---------- ----------
Shareholders' equity:
Serial preferred, $1 par value; 2,000,000
shares authorized and unissued.......... -- --
Common stock, $1 par value; 13,000,000
shares authorized; 11,001,806 and
10,984,833 shares issued and outstanding
in 1999 and 1998........................ 11,002 10,985
Additional paid-in capital................ 34,653 34,435
Retained earnings......................... 45,521 43,696
Accumulated other comprehensive income,
net of taxes............................ (559) 687
---------- ----------
Total shareholders' equity................ 90,617 89,803
---------- ----------
Total liabilities and shareholders' equity $1,040,863 $1,039,340
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
2
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
Three Months Ended March 31
- -------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------
(Unaudited)
Interest income:
Loans receivable........................ $ 13,714 $ 14,151
Investment securities................... 4,570 3,964
Interest-bearing deposits............... 90 243
--------- ---------
Total interest income.............. 18,374 18,358
--------- ---------
Interest expense:
Deposits................................ 5,522 6,133
Short-term borrowings................... 1,013 1,343
Long-term borrowings.................... 1,654 1,085
--------- ---------
Total interest expense............. 8,189 8,561
--------- ---------
Net interest income................ 10,185 9,797
--------- ---------
Provision for loan losses..................... 501 570
--------- ---------
Net interest income after provision
for loan losses...................... 9,684 9,227
--------- ---------
Non-interest income:
Fees and service charges................ 721 621
Gain on sale of assets.................. 2 6
Mortgage banking income................. 267 302
Other................................... 245 246
--------- ---------
Total non-interest income.......... 1,235 1,175
--------- ---------
Non-interest expenses:
Salaries and employee benefits.......... 3,375 3,273
Occupancy and equipment................. 1,408 1,456
Federal insurance premiums.............. 87 85
Other................................... 1,390 1,570
--------- ---------
Total non-interest expenses........ 6,260 6,384
--------- ---------
Income before income taxes......... 4,659 4,018
Income taxes............................ 1,623 1,354
--------- ---------
Net Income......................... $ 3,036 $ 2,664
--------- ---------
--------- ---------
Earnings per share:
Basic...................................... $ .28 $ .24
Diluted.................................... .27 .24
Weighted average number of shares outstanding:
Basic...................................... 10,989,290 10,896,772
Diluted.................................... 11,311,543 11,206,052
Dividends declared per share................. $ 0.110 $ 0.095
--------- ---------
--------- ---------
See accompanying notes to consolidated financial statements.
3
PRIME BANCORP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
AND OTHER COMPREHENSIVE INCOME
(Dollars in thousands)
Three Months Ended March 31,
- -------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------
(Unaudited)
Shareholders' Comprehensive Shareholders' Comprehensive
Equity Income Equity Income
- --------------------------------------------------------------------------------
Common stock:
Beginning of period $ 10,985 $ 10,888
Stock options exercise 17 46
-------- --------
End of period 11,002 10,934
-------- --------
Additional paid in capital:
Beginning of period 34,435 33,652
Stock options exercised 109 155
Tax benefit associated
with exercise of stock
options 109 199
-------- --------
End of period 34,653 34,006
-------- --------
Retained earnings:
Beginning of period 43,696 35,884
Net income 3,036 $ 3,036 2,664 $ 2,664
------- -------
Dividends declared (1,211) (1,039)
-------- -------
End of period 45,521 37,509
-------- -------
Accumulated comprehensive income:
Beginning of period 687 (560)
Unrealized holding gains
(losses) on securities
arising during the period,
net of income taxes (1,246) 92
------- -------
Other comprehensive income (1,246) (1,246) 92 92
------- -------
Comprehensive income $ 1,790 $ 2,756
------- ------- ------- -------
End of period (559) ------- (468) -------
------- -------
Total shareholders'
equity $90,617 $81,981
------- -------
------- -------
See accompanying notes to consolidated financial statements.
4
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended March 31,
- --------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities:
Net Income................................. $ 3,036 $ 2,664
Adjustments to reconcile net income
to net cash from operating
activities:
Depreciation......................... 580 818
(Gain) loss on sale of:
Loans held for sale................ (244) (205)
Real estate owned.................. 6 --
Provision for loan losses............ 501 570
Loans held for sale:
Originations, net of repayments.... (14,239) (14,650)
Sales.............................. 13,312 11,447
(Increase) decrease in other assets
and accrued interest receivable... (599) 7,116
Decrease in other liabilities........ (2,343) (467)
- ------------------------------------------------------------------------------
Net cash provided from operating
activities.................... 10 7,293
- ------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investment securities available
for sale.................................. -- (74,889)
Maturities of investment securities available
for sale................................. 23,527 14,317
Purchases of investment securities......... (433) (9,083)
Maturities of investment securities........ 11,845 15,746
Loans receivable:
Originations, net of repayments.......... (7,964) (245)
Proceeds from sale of land acquired for
development and resale................... 980 1,126
Increase in land acquired for development
and resale............................... (557) (335)
Purchase of property and equipment......... (502) (459)
Increase in real estate owned.............. (32) (178)
Proceeds from sale of real estate owned.... -- 579
- -----------------------------------------------------------------------------
Net cash provided from (used in) investing
activities............................. 26,864 (53,421)
- -----------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits................... 10,845 23,042
(Increase) decrease in repurchase agreements 3,115 (10,882)
Borrowings from the Federal Home Loan Bank
of Pittsburgh........................... 142,000 81,200
Repayments of borrowings from the Federal
Home Loan Bank of Pittsburgh ............ (152,503) (21,223)
Decrease in advance payments by borrowers
for taxes and insurance.................. (407) (545)
Net proceeds from issuance of common stock. 126 201
Cash dividends paid........................ (1,208) (1,034)
- -----------------------------------------------------------------------------
Net cash provided from (used in)
financing activities.................. 1,968 70,759
- -----------------------------------------------------------------------------
Net change in cash and cash equivalents 28,842 24,631
Cash and cash equivalents:
Beginning of period...................... 41,333 41,229
- -----------------------------------------------------------------------------
End of period............................ $ 70,175 $ 65,860
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................. $ 8,141 $ 8,484
Income taxes......................... 301 52
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Non-cash investing activity consisting of:
Transfer of loans to real estate owned $ 66 $ 12
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5
PRIME BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. 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 the management of Prime Bancorp, Inc.
necessary to present fairly the statement of results for the interim periods.
For further information refer to the consolidated financial statements and
footnotes thereto included in Prime Bancorp, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1998.
Business
Prime Bancorp, Inc. ("the Company") was incorporated under the laws of the
Commonwealth of Pennsylvania in 1996. The Company's principal subsidiary is
Prime Bank, a commercial bank (the "Bank") whose principal business consists of
attracting deposits and obtaining borrowings, then converting those deposits and
borrowings into various types of loans and investments.
The Company's corporate headquarters is in Fort Washington, Pennsylvania.
Its operations center is in northeast Philadelphia, Pennsylvania. The Company's
bank subsidiary has eight full service branch offices in Philadelphia, five in
Bucks County, Pennsylvania, eight in Montgomery County, Pennsylvania, two in
Delaware County, Pennsylvania, and one in Chester County, Pennsylvania.
The Company follows a corporate strategy which focuses on providing
individuals, businesses, and communities with high quality banking services.
Banking services include lending money, gathering money and other complimentary
fee generating services. The Company's loan products include commercial,
commercial real estate and consumer loans and residential mortgages. Deposits
and funding are gathered along five major lines which are checking, savings,
retail CDs, jumbo CDs and commercial cash management.
On February 17, 1999, Prime Bancorp, Inc. ("Prime") entered into a
definitive Agreement and Plan of Merger pursuant to which Summit Bancorp, Inc.
("Summit") will acquire Prime. Under the terms of the definitive agreement,
Summit will exchange one (1) share of Prime common stock for .675 shares of
Summit common stock in a tax-free exchange with a transaction value of
approximately $292.0 million. Upon the consummation of the merger with Summit
Bancorp, the Bank will merge with Summit Bank of Pennsylvania. The transaction
is subject to customary regulatory approvals and is anticipated to be completed
in the third quarter of 1999. As a result of the transaction, the Board of
Directors has concluded that it is in the best interest of the Company to defer
the holding of the 1999 annual meeting of shareholders indefinitely. A special
meeting of shareholders will be held to vote on the proposed transaction, and it
is anticipated that the Board of Directors will take action to set the date for
this meeting prior to April 30, 1999.
As a condition to its offer to acquire Prime, and to discourage other
companies from acquiring Prime, Summit required Prime to grant Summit a stock
option that allows Summit to buy up to 1,087,498 shares of Prime's common stock
at an exercise price of $18.00 per share. In addition, if the stock option
becomes exercisible and Summit exercises the option in full, Prime is required
to pay Summit $5,000,000. Summit can exercise the option only if another person
acquires 25% or more of Prime common stock or Prime agrees to be acquired by
another party, or Prime fails to hold the special meeting of shareholders to
approve the merger or the Prime Board modifies or withdraws its recommendation
of the merger after another person acquires or makes an offer to acquire 10% or
more of Prime common stock, or has disclosed its intention to make a proposal
for such transaction. As of the date of this document, we do not believe that
any of these events has occured.
The transaction is subject to certain regulatory approvals and is
anticipated to be completed by the third quarter of 1999.
6
PRIME BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share
The following table shows the computation of shares outstanding for
calculating earnings per share for the three months ended March 31, 1999 and
1998:
Three Months Ended March 31,
- -------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------
Basic
Numerator
Net income available to
common shareholders $ 3,036 $ 2,664
Demoninator
Weighted average shares
outstanding 10,989,290 10,896,772
- -----------------------------------------------------------------
Basic EPS $ .28 $ .24
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Diluted
Numerator
Net income available to
common shareholders $ 3,036 $ 2,664
Demoninator
Weighted average shares
outstanding 10,989,290 10,896,772
Dilutive stock options 322,253 309,280
- -----------------------------------------------------------------
11,311,543 11,206,052
- -----------------------------------------------------------------
Diluted EPS $ .27 $ .24
- -----------------------------------------------------------------
- -----------------------------------------------------------------
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Total assets at March 31, 1999 were $1.04 billion, about equal to the total
on December 31, 1998. The loan portfolio increased to $674.2 million at March
31, 1999 from $666.5 million at year-end 1998. The funding for this loan growth
came from maturing investment securities contributing to limited increases in
total assets was a strategy to reduce term borrowings from the Federal Home Loan
Bank when the use of these borrowed funds provide only a small investment
spread. The Company will continue to seek investment opportunities during
periods when borrowing costs are relatively attractive versus investment
opportunities.
The mix of the Company's loans receivable continues to show an emphasis on
commercial, commercial real estate and consumer assets as the following table
illustrates. The continuing decline in residential mortgages stems from
prepayments due to lower borrowing costs for consumers and from the Company's
strategy that generally results in the sale of new mortgage orginations into the
secondary markets.
Loan Portfolio
March 31, December 31,
1999 1998
- ------------------------------------------------------------------------------
Balance % Loans Balance % Loans Variance % Change
- ------------------------------------------------------------------------------
Commercial &
Commercial R.E. $ 431,175 64% $ 419,898 63% $ 11,277 3%
Consumer 119,732 18% 117,309 18% 2,423 2%
Residential 123,326 18% 129,276 19% (5,950) -5%
- ------------------------------------------------------------------------------
Total Loans $ 674,233 100% $ 666,483 100% $ 7,750 1%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
The Company is negotiating to sell its $11.0 million credit card portfolio
to MBNA. A definitive agreement, which will result in a gain, is in process and
is expected to close in the third quarter of 1999.
Year 2000 and the Company's State of Readiness
The Company has been pro-active in regard to the possible consequences that
the digital change to a new millennium may have on computers and other
operations. Prime is now primarily in the testing phase in its program to avoid
problems associated with this worldwide concern sometimes referred to as the
"Y2K issue". Testing for all major systems is scheduled for substantial
completion by mid-1999.
Late in 1997 Prime established a team of senior officers to address Y2K
issues. This company-wide effort involved an intense review of all systems and
functions that could be affected by the date change in question. Aside from
internal systems and functions, outside servicers and customers were subject to
review in regard to their Y2K preparedness. The result of this process was the
identification of 71 internal systems (six non-information technology related)
that might be affected by Y2K and a small number of customers whose systems
would need still further review and testing. See table II on page 9.
In accordance with the Company's year 2000 commercial credit policy, an
analysis was performed on the commercial and commercial real estate loans to
access the Y2K risk inherent in the loan portfolios and to determine whether
additional reserves are required to mitigate this risk. This analysis was based
on questionnaires as well as interviews with the customers, which were performed
by the Company's account officers. The results of the analysis and a second
interview with all borrowers rated high or medium risk based on the first
interview resulted in the conclusion that less than 9% of the commercial and
commercial real estate portfolios is rated high or medium risk and therefore no
additional reserves are required.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000 and the Company's State of Readiness - Continued
Through March 31, 1999, the Company had expensed over $250,000 in costs
related to the Y2K issue. It is estimated that an additional $1.8 million of
expenditures will be made during the next eighteen months. As some of these
future expenditures are capital items, the charge to current operating results
is less, as indicated in the table that follows. Y2K project costs are being
funded from operating cash flows and are not expected to have a material adverse
effect on the Company's results of operations.
TABLE I
ESTIMATED Y2K EXPENDITURES
Period Expenditures Charge to Expense
- ------------------------------------------------------------------
1997 1998 1999 2000
- ------------------------------------------------------------------
1997 $ 25,000 $ 25,000 $ -- $ -- $ --
1998 376,850 -- 101,100 173,200 115,510
1999 1,561,000 -- -- 367,400 284,900
2000 87,150 -- -- -- 12,100
- -----------------------------------------------------------------
$2,050,000 $ 25,000 $101,100 $540,600 $409,600
- -----------------------------------------------------------------
- -----------------------------------------------------------------
The relative completion status of all Y2K projects as of April 1999 is
reflected in the following table.
TABLE II
RELATIVE COMPLETION PERCENTS
Testing/
Exposure Area Assessment Remediation Validation Implementation
- --------------------------------------------------------------------------------------
Information Technology
(I/T) 100% 98% 94% 75%
Non-I/T (Vaults, phones,
fax machines, etc.) 100% 100% 100% 100%
3rd parties - Clients [*]
[*] Only 2% of client base was of sufficient size and systems dependent to be
assessed as "high risk" exposures in regard to Y2K. These commercial
borrowers are being subject to interviews and other assessments of their
Y2K readiness. The current evaluation of this exposure does not lead
management to believe that any incremental loss provisions are necessary.
A major portion of the Company's Information Technology budget has been
devoted to the Y2K problem. This has resulted in delayed implementation of
certain upgrades in systems capabilities that may have otherwise occurred.
On the other hand, certain Y2K resolution plans have accelerated the upgrade
of other system capabilities. The net result is that the Y2K effort has not
adversely delayed I/T projects and will not result in a material loss of
future revenues or material increases in future expenses.
Initially the Company used an outside vendor to help in the assessment
phase of major Y2K issues. In addition, the Company is subject to
independent review by banking regulators who periodically make onsite visits.
Based on these contacts, management believes it is making satisfactory
progress in its efforts to avoid any material adverse consequences from the
date change to a new millennium.
If no further progress regarding the Company's efforts to avoid Y2K
consequences were made, it is possible that there would be material adverse
effects on operating results. Customer deposit balances or loans receivable
may become inaccurate and lead to losses, the magnitude of which is not
reasonably possible to estimate, especially given the alternatives developed
in the Company's contingency plans. However, given the level of progress to
date and the momentum of the effort, management does not believe that material
adverse consequences will develop in the year 2000.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000 and the Company's State of Readiness - Continued
The Company has developed a Year 2000 Corporate Contingency Plan, which
was approved at the March 1999 Board Meeting, for "mission critical" systems
which are those that are essential to the Company's daily operating
effectiveness. These plans are designed to react in the event that the
solutions now in process to resolve Y2K issues are unsuccessful. Such plans
involve manual process intervention, staffing increases, outsourcing and other
alternatives.
The Year 2000 statements contained herein and in other securities or
regulatory filings of the Company or Prime Bank may not be relied upon as
representations or warranties for any purpose other than disclosure for
federal securities law compliance purposes.
Liquidity and Capital Resources
Liquidity is a measure of the ability to fund customers' needs for
borrowings and deposit withdrawals. The Company's principal sources of funds
are deposits, repayments on loans, proceeds from the sale of loans, funds from
operations, advances from the FHLB of Pittsburgh and repurchase agreements.
Cash flows from operating activities provided $10 thousand and $7.3
million for the three months ended March 31, 1999 and 1998, respectively. The
decrease is primarily due to the decrease in other assets of $7.1 million in
1998 compared to an increase of $599 thousand in 1999 which is partially
offset by a decrease in other liabilities.
Cash flows provided from investing activities were $26.9 million for the
three months ended March 31, 1999 compared to cash used in investing
activities of $53.4 million for the same period in 1998. This change was
primarily attributable to $84.0 million in investment security purchases in
1998 compared to $433 thousand in 1999. The decrease in investment activity
was the result of a lack of acceptable spreads in the investment market.
Cash flows provided by financing activities were $2.0 million for the
three months ended March 31, 1999 compared to $70.7 million for the same
period in 1998. This change is primarily attributable to $60.0 million in net
borrowings from the Federal Home Loan Bank of Pittsburgh in 1998 compared to a
net repayment of $10.5 million in 1999. The 1998 borrowings were used to
support the investment activity. Deposits in 1999 increased $10.8 million
compared to $23.0 million for the same period in 1998.
Forward-Looking Statements
This report contains certain forward looking statements, either expressed
or implied, which are provided to assist the reader in making judgements about
the Company's possible future financial performance. 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, competition and unexpected contingencies relating to Year 2000
compliance 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.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Capital
The Board of Governors of the Federal Reserve System (the "FRB") has
adopted risk-based capital and leverage ratio requirements for bank holding
companies and banks which are members of the Federal Reserve System. At March
31, 1999, the Company and the Bank met each of its capital requirements. The
table below sets forth the minimum capital ratios applicable to the Company
and the Bank, together with the actual dollar amounts and percentages of
capital for the Bank in each category at March 31, 1999:
For
Capital To Be Well
Adequacy Capitalized Under
Actual Purposes: Action Provisions:
-------------- -------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
-------------- -------------- ------------------
Total Capital (to risk weighted assets):
Prime Bancorp $97,799 13.06% $59,925 8.00% $74,906 10.00%
Prime Bank 96,709 12.91% 59,906 8.00% 74,883 10.00%
Tier I Capital (to risk weighted assets):
Prime Bancorp 88,429 11.81% 29,962 4.00% 44,944 6.00%
Prime Bank 87,342 11.66% 29,953 4.00% 44,930 6.00%
Total Leverage (to average assets):
Prime Bancorp 88,429 8.65% 40,870 4.00% 51,088 5.00%
Prime Bank 87,342 8.56% 40,819 4.00% 51,023 5.00%
Net Income
The Company reported net income of $3.0 million for the three months
ended March 31,1999. This represents an increase of $372 thousand (14%) when
compared to the same period in 1998.
Three Months Ended
March 31, Increase
-------------------
1999 1998 (Decrease) % Change
------------------------------------------
Net interest income $10,185 $ 9,797 $ 388 4.0%
Provision for loan losses 501 570 (69) (12.1%)
Fees and service charges 721 621 100 16.1%
Gain on sale of assets 2 6 (4) (66.7%)
Mortgage banking activities 267 302 (35) (11.6%)
Other income 245 246 (1) (0.4%)
Operating expenses 6,260 6,384 (124) (1.9%)
Taxes 1,623 1 354 269 19.9%
------- ------- ------ --------
Net income $ 3,036 $ 2,664 $ 372 14.0%
------- ------- ------ --------
------- ------- ------ --------
Higher net interest income along with increased revenues from fees and
service charges along with small decreases in the lower loan loss provision
and operating expenses were the primary reasons for increased net revenues for
the three month period as summarized above. Higher taxes partly offset the
increase in net revenues.
On a diluted per share basis net income for the three month period
amounted to $0.27 compared to $0.24 in the similar period of 1998, a 13%
increase.
The increases in net income helped to raise performance ratios as the
Company's return on average equity rose to 13.6% for the three month period
ended March 31, 1999 compared to 13.4% in the same period of 1998. The return
on average assets was 1.20% compare to 1.12% in the year ago period.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net Interest Income
Net interest income was $10.2 million for the three months ended March
31, 1999. This represents a 4.0% increase when compared to net interest
income of $9.8 million for the same period in 1998. This is primarily due to
loan growth in higher yielding commercial and commercial real estate loans.
The net interest margin decreased to 4.29% from 4.41% for the three
months ended March 31, 1999 and 1998. The decrease is the result of a decline
in yields following Federal Reserve actions to lower market rates that was not
wholly offset by lower deposit and borrowing costs.
The table below illustrates the changes in the net interest rate margin
and interest rate spread for the three months ended March 31, 1999 and 1998.
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT
INCOME/EXPENSE AND RATES
(Dollars in thousands)
Three Months Ended March 31,
- -----------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------
Average Interest Average Interest
Balance Inc/Exp Yield Balance Inc/Exp Yield
- -----------------------------------------------------------------------------
Interest earning assets:
Commercial & commercial
real estate $ 420,175 $ 8,959 8.65% $353,873 $ 8,188 9.38%
Consumer 119,519 2,501 8.49% 107,883 2,527 9.50%
Residential mortgages 127,086 2,254 7.09% 180,204 3,436 7.63%
- ------------------------------------------------------------------------------
Total loans 666,780 13,714 8.34% 641,960 14,151 8.94%
- ------------------------------------------------------------------------------
Investments 303,425 4,735 6.33% 265,017 4,282 6.55%
- ------------------------------------------------------------------------------
Total earning assets 970,205 18,449 7.71% 906,977 18,433 8.24%
- ------------------------------------------------------------------------------
Allowance for loan loss (9,781) -- -- (8,624) -- --
Non-earning assets 65,604 -- -- 64,727 -- --
- ------------------------------------------------------------------------------
Total assets $1,026,028 $18,449 $963,080 $18,433
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Interest-bearing liabilities:
Demand $ 177,306 $ 60 0.14% $149,136 $ 62 0.17%
Savings 239,710 1,745 2.95% 194,086 1,406 2.94%
Retail C/D's 254,253 3,281 5.23% 298,863 3,949 5.36%
Jumbo C/D's 37,031 436 4.77% 53,112 716 5.47%
- ------------------------------------------------------------------------------
Total deposits 708,300 5,522 3.16% 695,197 6,133 3.58%
- ------------------------------------------------------------------------------
Borrowings 220,753 2,667 4.90% 182,415 2,428 5.40%
- ------------------------------------------------------------------------------
Total interest-bearing
liabilities 929,053 8,189 3.57% 877,612 8,561 3.96%
- ------------------------------------------------------------------------------
Other liabilities 6,269 -- -- 4,823 -- --
Shareholders' equity 90,706 -- -- 80,645 -- --
- ------------------------------------------------------------------------------
Total liabilities &
shareholders' equity $1,026,028 $ 8,189 $963,080 $ 8,561
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Net interest income/interest
rate spread $ 10,260 4.14% $ 9,872 4.28%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Net interest earning
assets/net yield $ 41,152 4.29% $ 29,365 4.41%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Interest earning assets to
interest- bearing
liabilities 104% 103%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Provisions for Loan Losses
The provision for loan losses was $501 thousand for the three months
ended March 31, 1999 compared to $570 thousand for the same period in 1998.
The allowance for loan losses was $9.9 million and $9.6 million at March 31,
1999 and December 31, 1998, respectively. The Company had net charge-offs of
$148 thousand for the three months ended March 31, 1999, compared to $186
thousand for the comparable period in 1998.
The allowance for loan losses is based on a periodic evaluation of the
loan portfolio and is maintained at a level that management considers adequate
to absorb estimated potential losses. Management considers a variety of
factors, and recognizes the inherent risk of loss that always exists in the
lending process. Management uses a disciplined methodology to estimate the
appropriate level of allowance for loan losses. This methodology includes an
evaluation of loss potential from individual problem credits, as well as
anticipated specific and general economic factors that may adversely affect
collectibility.
Management's determination of the adequacy of the allowance is based on
periodic evaluations of the credit portfolio. This evaluation is inherently
subjective as it requires material estimates, including, among others, the
amounts and timing of expected future cash flows on impaired loans, estimated
losses on the loan portfolio, and general amounts for historical loss
experience, economic conditions, uncertainties in estimating losses and
inherent risks in the various credit portfolios, all of which may be
susceptible to significant change. Pursuant to Statement of Financial
Accounting Standard ("SFAS") No. 114, Accounting by Creditors for Impairment
of a Loan, as amended, impaired loans, consisting of nonaccrual and
restructured commercial and commercial real estate loans, are considered in
the methodology for determining the allowance for credit losses. Impaired
loans are generally evaluated based on the present value of expected future
cash flows or the fair value of the underlying collateral if principal
repayment is expected to come from the sale or operation of such collateral.
The following is a summary of the activity in the allowance for loan
losses for the three months ended March 31, 1999 and 1998 (Dollars in
thousands):
1999 1998
- -----------------------------------------------------------------------------
Balance at the beginning of period $ 9,569 $ 8,485
Provision for loan losses 501 570
Recoveries:
Commercial & Commercial Real Estate 22 76
Consumer 24 43
Residential 50 2
--------- --------
Total 96 121
--------- --------
Losses charged against allowance:
Commercial & Commercial Real Estate (22) (17)
Consumer (222) (290)
--------- ---------
Total (244) (307)
--------- ---------
Balance at the end of period $ 9,922 $ 8,869
--------- ---------
--------- ---------
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Credit Risk
Credit risk exists in financial instruments such as loans and leases,
investments and off-balance sheet instruments including loan commitments,
letters of credit and derivative instruments. The object of credit risk
management is to reduce the risk of loss if a party to a contract fails to
perform according to the terms of a transaction. Essential to this process
are thorough underwriting practices regarding new commitments, active
monitoring of all portfolios and the early identification of potential
problems and their prompt resolution.
The Company manages credit risk by maintaining a well-diversified credit
portfolio and by adhering to its board approved credit policies. All loan
approvals are made by at least two experienced banking officers. The level of
officer approvals required is determined by the dollar amount and risk
characteristics of the credit extension. The credit process also includes the
review of approved and renewed loan relationships over $1.0 million by a
committee of directors.
Asset Quality
Non-performing assets, which include non-accruing loans and real estate
owned, totaled $3.4 million at March 31, 1999 compared to $3.6 million at
December 31, 1998.
The following table sets forth non-performing assets as of March 31, 1999
and December 31, 1998 (Dollars in thousands):
March 31, December 31, March 31,
1999 1998 1998
- ---------------------------------------------------------------------------
Non-accrual loans (1):
Residential loans $ 1,334 $ 1,302 $ 1,276
Consumer loans 494 552 383
Commercial loans 759 1,056 1,069
-------- -------- --------
Total non-accrual loans 2,587 2,910 2,727
Real estate owned 794 702 568
-------- -------- --------
Total non-performing assets $ 3,381 $ 3,612 $ 3,295
-------- -------- --------
-------- -------- --------
Total non-performing loans to
loans receivable 0.38% 0.44% 0.43%
-------- -------- --------
-------- -------- --------
Total non-performing assets to
total assets 0.32% 0.35% 0.32%
-------- -------- --------
-------- -------- --------
Ratio of allowance for loan
losses to non-performing loans 383.53% 328.72% 325.23%
-------- -------- --------
-------- -------- --------
(1) Statistics do not include the impact of a condominium project, which
was acquired in 1995 by a deed in lieu of foreclosure and classified
as land acquired for development and resale. Non-performing assets
and the ratio of non-performing assets to total assets would have
been $4.7 million and 0.45% at March 31, 1999, $5.3 million and 0.51%
at December 31, 1998 and $8.5 million and 0.83% at March 31, 1998 if
the condominium project was included in non-performing assets.
Non-Interest Income
Non-interest income was $1.24 million for the three months ended March
31, 1999. This is an increase of 5% when compared to the same period in 1998.
The increase in income was principally due to more fee income from increased
commercial deposit relationships.
Mortgage banking income, including profits from the origination and sale
of residential mortgages, totaled $267 thousand compared to $302 thousand in
the same period of 1998.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Non-Interest Expense
The primary component of non-interest expenses is salaries and employee
benefits, which increased 3.1% for the three months ended March 31, 1999 to
$3.4 million from $3.3 million in 1998. This increase is primarily
attributable to the Company's expanded commercial banking activities and the
addition of technology manpower, some of which is related to the Y2K issue.
Occupancy and equipment expense decreased to $1.4 million for the three
months ended March 31, 1999 from $1.5 million for the same period in 1998.
The decrease is primarily attributable to lower machine maintenance costs due
to technological enhancements involving the upgrading of data processing and
telecommunication systems in 1998.
Other expenses decreased to $1.5 million for the three months ended March
31, 1999 from $1.7 million for the same period in 1998. This decrease is
primarily attributable to reduced expenses relating to real estate owned and
shares tax expense.
Dividend Policy
The Board of Directors of the Company declared a cash dividend of $0.11
per share of common stock on March 18, 1999, payable April 30, 1999, to
shareholders of record on March 31, 1999. It is currently the Board's
intention to continue to pay dividends on a quarterly basis. The dividend
declared on March 18, 1999 was the Company's forty-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 Banks' payment of dividends 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.
Under Pennsylvania banking law, the Bank may declare and pay dividends
only out of accumulated net earnings, and a dividend may not be declared or
paid out of its surplus. Furthermore, under federal and state banking laws,
an institution may be prevented from paying dividends under certain
circumstances when it is not adequately capitalized.
15
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The risk of loss from adverse interest rate changes is monitored by
evaluating the impact, if any, on the Company's net interest income under a
variety of rate assumptions. Management attempts to limit the projected
negative impact of interest rate changes on its income. Consequently, if the
Company's internal analysis would suggest that a reasonably possible rate
projection would result in a significant loss of net interest income
(generally about 5% or more), it would act to mitigate this potential future
risk. The steps to mitigate possible interest rate risk include changing the
mix of assets and their scheduled maturities. Among the assets most likely
for these changes are investment securities available for sale and short-term
money market investments. Changing the composition and maturity of certain
liabilities is also an alternative management may consider as is the option of
using derivative financial instruments to adjust a given sensitivity position.
No material changes in the Company's market risk or market strategy
occurred during the current period. A detailed discussion of market risk is
provided in the SEC Form 10-K for the period ended December 31, 1998.
16
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
a. Exhibits
27 Financial Data Schedule
b. Reports on Form 8-K
None
17
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: April 22, 1999 /s/ James J. Lynch
--------------------------
James J. Lynch
President and Chief
Executive Officer
Date: April 22, 1999 /s/ Frank H. Reeves
--------------------------
Frank H. Reeves
Senior Vice President and
Chief Accounting Officer
18